Credit risk in derivative securities: A simplified approach. Issue 5 (1st February 2021)

• Record Type: Journal Article
• Authors: Baule, Rainer
• Is Part Of: Journal of futures markets. Volume 41:Issue 5(2021)
• Page Start: 641
• Page End: 657
• Publication Date: 2021-02-01
• Subjects: certificates -- credit risk -- option pricing -- vulnerable options; Commodity exchanges -- Periodicals; Foreign exchange futures -- Periodicals; 332.632
• DOI: 10.1002/fut.22189
• Languages: English
• ISSNs: 0270-7314

Abstract

Abstract: The pricing of options and other derivatives which are subject to the default risk of the writer usually requires the calibration of a sophisticated model and substantial effort in determining the input parameters. We propose a very simple method to incorporate correlated credit risk into the pricing of vulnerable derivatives. The approach is based upon some approximations of more complex models and requires a minimum of input parameters. It is therefore easily applicable and maintains the accuracy of sophisticated models to a large extent, as shown in numerical studies for call options, put options, and discount certificates.