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Analytical valuation of Asian options with counterparty risk under stochastic volatility models

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  • Xingchun Wang

Abstract

In this paper, we consider Asian options with counterparty risk under stochastic volatility models. We propose a simple way to construct stochastic volatility models through the market factor channel. In the proposed framework, we obtain an explicit pricing formula of Asian options with counterparty risk and illustrate the effects of systematic risk on Asian option prices. Specially, the U‐shaped and inverted U‐shaped curves appear when we keep the total risk of the underlying asset and the issuer's assets unchanged, respectively.

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  • Xingchun Wang, 2020. "Analytical valuation of Asian options with counterparty risk under stochastic volatility models," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(3), pages 410-429, March.
    • Handle: RePEc:wly:jfutmk:v:40:y:2020:i:3:p:410-429
    DOI: 10.1002/fut.22064
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    3. Jeon, Jaegi & Kim, Geonwoo & Huh, Jeonggyu, 2021. "An asymptotic expansion approach to the valuation of vulnerable options under a multiscale stochastic volatility model," Chaos, Solitons & Fractals, Elsevier, vol. 144(C).
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    5. Chih-Chen Hsu & Chung-Gee Lin & Tsung-Jung Kuo, 2020. "Pricing of Arithmetic Asian Options under Stochastic Volatility Dynamics: Overcoming the Risks of High-Frequency Trading," Mathematics, MDPI, vol. 8(12), pages 1-16, December.
    6. Wang, Xingchun, 2020. "Valuation of Asian options with default risk under GARCH models," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 27-40.
    7. Li, Zelei & Wang, Xingchun, 2020. "Valuing spread options with counterparty risk and jump risk," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).

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