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Pricing of Power Exchange Option with Jumps under the Double Risk of Exchange and Default

Author

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  • Kaili Xiang
  • Peng Hu
  • Jie Shen

Abstract

Power exchange option is an exotic option which combines power option and exchange option. In this paper, we consider the pricing of the power exchange option under exchange rate volatility risk and issuing company bankruptcy risk. Meanwhile, considering the major events between the two countries, we add the Poisson jump process to the option model in order to reflect the impact of sudden factors on the price of transnational derivatives in the international market. According to the no-arbitrage principle, a mathematical model for pricing such problems is established, and explicit solutions are obtained. The numerical examples show that the model established in this paper is effective.

Suggested Citation

  • Kaili Xiang & Peng Hu & Jie Shen, 2020. "Pricing of Power Exchange Option with Jumps under the Double Risk of Exchange and Default," Mathematical Problems in Engineering, Hindawi, vol. 2020, pages 1-12, March.
    • Handle: RePEc:hin:jnlmpe:4268196
    DOI: 10.1155/2020/4268196
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    Cited by:

    1. Geonwoo Kim, 2020. "Valuation of Exchange Option with Credit Risk in a Hybrid Model," Mathematics, MDPI, vol. 8(11), pages 1-11, November.

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