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Valuation of vulnerable American options with correlated credit risk

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  • Lung-Fu Chang
  • Mao-Wei Hung

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  • Lung-Fu Chang & Mao-Wei Hung, 2006. "Valuation of vulnerable American options with correlated credit risk," Review of Derivatives Research, Springer, vol. 9(2), pages 137-165, September.
    • Handle: RePEc:kap:revdev:v:9:y:2006:i:2:p:137-165
    DOI: 10.1007/s11147-007-9007-5
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    1. Ho, T S & Stapleton, Richard C & Subrahmanyam, Marti G, 1997. "The Valuation of American Options with Stochastic Interest Rates: A Generalization of the Geske-Johnson Technique," Journal of Finance, American Finance Association, vol. 52(2), pages 827-840, June.
    2. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    3. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409, World Scientific Publishing Co. Pte. Ltd..
    4. Johnson, Herb & Stulz, Rene, 1987. "The Pricing of Options with Default Risk," Journal of Finance, American Finance Association, vol. 42(2), pages 267-280, June.
    5. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    6. Bunch, David S & Johnson, Herb, 1992. "A Simple and Numerically Efficient Valuation Method for American Puts Using a Modified Geske-Johnson Approach," Journal of Finance, American Finance Association, vol. 47(2), pages 809-816, June.
    7. Hull, John & White, Alan, 1995. "The impact of default risk on the prices of options and other derivative securities," Journal of Banking & Finance, Elsevier, vol. 19(2), pages 299-322, May.
    8. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
    9. Trigeorgis, Lenos, 1991. "A Log-Transformed Binomial Numerical Analysis Method for Valuing Complex Multi-Option Investments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(3), pages 309-326, September.
    10. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
    11. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    12. Geske, Robert & Johnson, Herb E, 1984. "The American Put Option Valued Analytically," Journal of Finance, American Finance Association, vol. 39(5), pages 1511-1524, December.
    13. Omberg, Edward, 1987. "A Note on the Convergence of Binomial-Pricing and Compound-Option," Journal of Finance, American Finance Association, vol. 42(2), pages 463-469, June.
    14. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    15. Chung, San-Lin, 2002. "Pricing American Options on Foreign Assets in a Stochastic Interest Rate Economy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(4), pages 667-692, December.
    16. Klein, Peter & Inglis, Michael, 2001. "Pricing vulnerable European options when the option's payoff can increase the risk of financial distress," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 993-1012, May.
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    Cited by:

    1. Wang, Guanying & Wang, Xingchun & Zhou, Ke, 2017. "Pricing vulnerable options with stochastic volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 485(C), pages 91-103.
    2. Xie, Yurong & Deng, Guohe, 2022. "Vulnerable European option pricing in a Markov regime-switching Heston model with stochastic interest rate," Chaos, Solitons & Fractals, Elsevier, vol. 156(C).
    3. Jeon, Junkee & Kim, Geonwoo, 2019. "Pricing of vulnerable options with early counterparty credit risk," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 645-656.
    4. Rafael Company & Vera N. Egorova & Lucas Jódar, 2024. "An ETD Method for Vulnerable American Options," Mathematics, MDPI, vol. 12(4), pages 1-14, February.
    5. Koo, Eunho & Kim, Geonwoo, 2017. "Explicit formula for the valuation of catastrophe put option with exponential jump and default risk," Chaos, Solitons & Fractals, Elsevier, vol. 101(C), pages 1-7.
    6. Eric Djeutcha & Jules Sadefo Kamdem, 2022. "Pricing for a vulnerable bull spread options using a mixed modified fractional Hull-White-Vasicek model," Post-Print hal-03675886, HAL.
    7. Geonwoo Kim, 2020. "Valuation of Exchange Option with Credit Risk in a Hybrid Model," Mathematics, MDPI, vol. 8(11), pages 1-11, November.
    8. Kim, Geonwoo & Koo, Eunho, 2016. "Closed-form pricing formula for exchange option with credit risk," Chaos, Solitons & Fractals, Elsevier, vol. 91(C), pages 221-227.

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    More about this item

    Keywords

    American options; Derivatives; Default; Credit risk; Multi-exercisable; Martingale; G13;
    All these keywords.

    JEL classification:

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

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