East Asian mathematical journal

The Youngnam Mathematical Society (영남수학회)
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SIMPLIFIED APPROACH TO VALUATION OF VULNERABLE EXCHANGE OPTION UNDER A REDUCED-FORM MODEL

  • Huh, Jeonggyu (Department of Statistics, Chonnam National University) ;
  • Jeon, Jaegi (Department of Mathematical Sciences, Seoul National University) ;
  • Kim, Geonwoo (School of Liberal Arts, Seoul National University of Science and Technology)
  • Received : 2020.12.14
  • Accepted : 2021.01.16
  • Published : 2021.01.31
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Abstract

In this paper, we investigate the valuation of vulnerable exchange option that has credit risk of option issuer. The reduced-form model is used to model credit risk. We assume that credit event is determined by the jump of the counting process with stochastic intensity, which follows the mean reverting process. We propose a simple approach to derive the closed-form pricing formula of vulnerable exchange option under the reduced-form model and provide the pricing formula as the standard normal cumulative function.

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References

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