The European Vulnerable Option Pricing with Jumps Based on a Mixed Model

Abstract

In this paper, we combine the reduced-form model with the structural model to discuss the European vulnerable option pricing. We define that the default occurs when the default process jumps or the corporate goes bankrupt. Assuming that the underlying asset follows the jump-diffusion process and the default follows the Vasicek model, we can have the expression of European vulnerable option. Then we use the measure transformation and martingale method to derive the explicit solution of it.

Power Exchange Option with a Hybrid Credit Risk under Jump-Diffusion Model

“…Recently, hybrid credit risk models that combine the structural model and reducedform model were proposed to develop the credit risk models for vulnerable options [18][19][20]. The hybrid model is more realistic because it reflects the characteristics of both models.…”

Valuation of Exchange Option with Credit Risk in a Hybrid Model

“…Furthermore, many researchers have studied vulnerable exotic options such as the American option [22], the Asian option [23], the exchange option [24], and the path-dependent option [25] under the structural model. Recently, several researchers proposed the hybrid credit risk models, incorporating the structural model and reduced-form model and provided the pricing formula of vulnerable European option [26,27]. In this paper, we deal with the option valuation based on a hybrid credit risk model.…”