The Pricing of Vulnerable Options Under Jump-Diffusion Model

Abstract

This paper addresses the valuation of Vulnerable European Call Options which might default before the option's maturity.Default occurs when the writer's asset liability ratio is less than one specific critical level,the asset liability ratio that follows geometric Brownian motion.Once default happens,the option will be executed immediately,and the compensation rate is exogenous variable.Moreover,the stock price follows jump-diffusion model where the jumping size is considered more generally.This paper improves Rich's and WEI Zhengyuan's works by simplifying the model and perfecting the evaluation of default time,and it provides data analysis realized by Matlab.