Abstract
The counterparty credit risk should be considered when valuing options traded in the over-the-counter (OTC) markets because the OTC markets have rapidly grown, and the credit risk in the OTC markets has become an important issue since the global financial crisis. In this paper, we propose two types of vulnerable options whose payoffs allow for the counterparty credit risk prior to maturity of the options. We use Mellin transforms to solve the partial differential equations for the vulnerable option prices with early counterparty credit risk. In addition, we present numerical experiment results with the Monte Carlo simulations to show the accuracy of the pricing formulas and provide graphs to illustrate the properties of options.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callMore From: The North American Journal of Economics and Finance
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
