Pricing power exchange options with default risk, stochastic volatility and stochastic interest rate

This paper investigates the valuation of vulnerable exchange options with two underlying assets that follow a two-factor volatility model. We employ a reduced-form model incorporating a Poisson process with stochastic intensity. The proposed reduced-form model depends on a stochastic intensity process that is guaranteed to remain positive and includes both systemic and idiosyncratic risks. Using measure change techniques and characteristic functions, we obtain an explicit pricing formula for vulnerable exchange options within the proposed framework. We also provide numerical examples demonstrating the sensitivity of option prices to significant parameters.

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Pricing power exchange options with default risk, stochastic volatility and stochastic interest rate

Cited by 4 publications

References 33 publications

Valuing options with hybrid default risk under the stochastic volatility model

Valuing options with hybrid default risk under the stochastic volatility model

European vulnerable options pricing under sub-mixed fractional jump-diffusion model with stochastic interest rate

Analytical Valuation of Vulnerable Exchange Options with Stochastic Volatility in a Reduced-Form Model

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