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Analytical valuation of vulnerable chained options

Author

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  • Zhang, Jiayi
  • Zhou, Ke

Abstract

In this paper, we present analytical pricing formulae for vulnerable chained options. To derive the price, we provide the joint probability that one of the two-dimensional Brownian motions hits multiple barriers sequentially before a fixed time and the positions of both Brownian motions. Using the derived formulae, we perform numerical analysis to investigate the impacts of counterparty risk on option prices.

Suggested Citation

  • Zhang, Jiayi & Zhou, Ke, 2024. "Analytical valuation of vulnerable chained options," The North American Journal of Economics and Finance, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:ecofin:v:70:y:2024:i:c:s1062940823001924
    DOI: 10.1016/j.najef.2023.102069
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    More about this item

    Keywords

    Vulnerable options; Chained options; Barrier options; Credit risk;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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