The European Vulnerable Option Pricing with Jumps Based on a Mixed Model

In this paper, we combine the reduced‐form model with the structural model to discuss the European vulnerable option pricing. We define that the default occurs when the default process jumps or the corporate goes bankrupt. Assuming that the underlying asset follows the jump‐diffusion process and the default follows the Vasicek model, we can have the expression of European vulnerable option. Then we use the measure transformation and martingale method to derive the explicit solution of it.