Valuing Seller‐Defaultable Options

Abstract

This study analyzes seller-defaultable options that allow option writers to have a free-will right to default, along with some prespecified default mechanisms. We analytically and numerically examine the pricing, hedging, defaulting, and profitability of the seller-defaultable options, considering three possible scenarios for seller default. Analyzing the essential implications of seller-defaultable options, we show that the option price is positively correlated with the default fine, underlying asset price, and volatility. The seller-defaultable option's Greeks appear more complicated than those of the plain vanilla options. The likelihood of sellers The authors would like to thank anonymous referees and the editor for their helpful comments. The authors alone remain responsible for any errors in connection with this work.