Explicit Pricing Formulas for European Option with Asset Exposed to Double Defaults Risk. (25th June 2018)

• Record Type: Journal Article
• Authors: He, Taoshun
• Other Names: Peterson Allan C. Academic Editor.
• Is Part Of: Discrete dynamics in nature and society. Volume 2018(2018)
• Publication Date: 2018-06-25
• Subjects: System analysis -- Periodicals; Dynamics -- Periodicals; Chaotic behavior in systems -- Periodicals; Differentiable dynamical systems -- Periodicals; 003.05
• DOI: 10.1155/2018/8362912
• Languages: English
• ISSNs: 1026-0226

Abstract

Abstract : We derive analytical formulas for European call and put options on underlying assets that are exposed to double defaults risks which include exogenous counterparty default risk and endogenous default risk. The endogenous default risk leads the asset price to drop to zero and the exogenous counterparty default risk induces a drop in the asset price, but the asset can still be traded after this default time. A novel technique is developed to evaluate the European call and put options by first conditioning on the predefault and the postdefault time and then obtaining the unconditional analytic formulas for their price. We also compare the pricing results of our model with default-free option model and counterparty default risk option model.