Pricing Vulnerable Options with Copulas
In this paper we apply a copula function pricing technique to the evaluation of vulnerable options, i.e. options with counterpart risk. Using copulas enables to separate the specification of marginal distributions and the dependence structure of the events of exercise of the option and default of the counterpart. Our proof that counterpart risk is evaluated as a copula function is based on no-arbitrage arguments only. This makes our results directly applicable to incomplete market models. Also, the no-arbitrage arguments provide easy-to-implement super-replication strategies. We study digital, call and put options with counterpart risk. Furtehr, we price a credit derivative contract, namely a default put option. We calibrate the models on real market data, using a mixing copula, which provides closed form pricing formulas.
|Date of creation:||Jan 2002|
|Date of revision:|
|Contact details of provider:|| Postal: Corso Unione Sovietica, 218bis - 10134 Torino - Italy|
Phone: +39 011 6706060
Fax: +39 011 6706060
Web page: http://www.esomas.unito.it/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Umberto Cherubini & Elisa Luciano, 2002. "Multivariate Option Pricing with Copulas," ICER Working Papers - Applied Mathematics Series 05-2002, ICER - International Centre for Economic Research.
- Umberto Cherubini & Giovanni Della Lunga, 2001. "Liquidity and credit risk," Applied Mathematical Finance, Taylor & Francis Journals, vol. 8(2), pages 79-95.
When requesting a correction, please mention this item's handle: RePEc:icr:wpmath:06-2002. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Simone Pellegrino)
If references are entirely missing, you can add them using this form.