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Pricing vulnerable options under correlated skew Brownian motions

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  • Che Guo
  • Xingchun Wang

Abstract

In this paper, we consider vulnerable options in a pricing model with correlated skew Brownian motions. In the proposed pricing model, both the underlying asset and option issuer's assets are exposed to endogenous and exogenous risks. We deduct a new pricing formula of vulnerable European options, and then use it to illustrate the effect of the skewness parameters on vulnerable option prices. An interesting finding is that vulnerable option prices are higher when the variance of the logarithm of option issuer's assets is larger in some cases.

Suggested Citation

  • Che Guo & Xingchun Wang, 2022. "Pricing vulnerable options under correlated skew Brownian motions," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(5), pages 852-867, May.
    • Handle: RePEc:wly:jfutmk:v:42:y:2022:i:5:p:852-867
    DOI: 10.1002/fut.22311
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    Cited by:

    1. Panhong Cheng & Zhihong Xu & Zexing Dai, 2023. "Valuation of vulnerable options with stochastic corporate liabilities in a mixed fractional Brownian motion environment," Mathematics and Financial Economics, Springer, volume 17, number 3, June.

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