scholarly journals Valuation of Exchange Option with Credit Risk in a Hybrid Model

Mathematics ◽  
2020 ◽  
Vol 8 (11) ◽  
pp. 2091
Author(s):  
Geonwoo Kim
Keyword(s):  
Credit Risk ◽  
Hybrid Model ◽  
Structural Model ◽  
Risk Model ◽  
Probabilistic Approach ◽  
Option Price ◽  
Distribution Functions ◽  
Cumulative Distribution ◽  
Reduced Form ◽  
Exchange Option

In this paper, the valuation of the exchange option with credit risk under a hybrid credit risk model is investigated. In order to build the hybrid model, we consider both the reduced-form model and the structural model. We adopt the probabilistic approach to derive the closed-form formula of an exchange option price with credit risk under the proposed model. Specifically, the change of measure technique is used repeatedly, and the pricing formula is provided as the standard normal cumulative distribution functions.

scholarly journals Power Exchange Option with a Hybrid Credit Risk under Jump-Diffusion Model

Mathematics ◽  
2021 ◽  
Vol 10 (1) ◽  
pp. 53
Author(s):  
Junkee Jeon ◽  
Geonwoo Kim
Keyword(s):  
Credit Risk ◽  
Structural Model ◽  
Risk Model ◽  
Diffusion Processes ◽  
Jump Diffusion ◽  
Reduced Form ◽  
Jump Diffusion Processes ◽  
Power Exchange ◽  
Jump Diffusion Model ◽  
Exchange Option

In this paper, we study the valuation of power exchange options with a correlated hybrid credit risk when the underlying assets follow the jump-diffusion processes. The hybrid credit risk model is constructed using two credit risk models (the reduced-form model and the structural model), and the jump-diffusion processes are proposed based on the assumptions of Merton. We assume that the dynamics of underlying assets have correlated continuous terms as well as idiosyncratic and common jump terms. Under the proposed model, we derive the explicit pricing formula of the power exchange option using the measure change technique with multidimensional Girsanov’s theorem. Finally, the formula is presented as the normal cumulative functions and the infinite sums.

Replication of Contingent Claims in a Reduced-Form Credit Risk Model with Discontinuous Asset Prices

2006 ◽  
Vol 22 (4) ◽  
pp. 661-687 ◽  
Author(s):  
Tomasz R. Bielecki ◽  
Monique Jeanblanc ◽  
Marek Rutkowski
Keyword(s):  
Credit Risk ◽  
Asset Prices ◽  
Risk Model ◽  
Contingent Claims ◽  
Reduced Form ◽  
Credit Risk Model

scholarly journals CREDIT RISK AND INCOMPLETE INFORMATION: FILTERING AND EM PARAMETER ESTIMATION

2010 ◽  
Vol 13 (05) ◽  
pp. 683-715 ◽  
Author(s):  
CLAUDIO FONTANA ◽  
WOLFGANG J. RUNGGALDIER
Keyword(s):  
Parameter Estimation ◽  
Credit Risk ◽  
Financial Market ◽  
Risk Model ◽  
Information Filtering ◽  
Credit Spreads ◽  
Reduced Form ◽  
Contagion Effect ◽  
Credit Risk Model ◽  
Filtering Approach

We consider a reduced-form credit risk model where default intensities and interest rate are functions of a not fully observable Markovian factor process, thereby introducing an information-driven default contagion effect among defaults of different issuers. We determine arbitrage-free prices of OTC products coherently with information from the financial market, in particular yields and credit spreads and this can be accomplished via a filtering approach coupled with an EM-algorithm for parameter estimation.

scholarly journals Closed-form pricing formula for foreign equity option with credit risk

2021 ◽  
Vol 2021 (1) ◽  
Author(s):  
Donghyun Kim ◽  
Ji-Hun Yoon ◽  
Geonwoo Kim
Keyword(s):  
Credit Risk ◽  
Closed Form ◽  
Distribution Functions ◽  
Cumulative Distribution ◽  
Transform Method ◽  
Equity Options ◽  
Over The Counter ◽  
3 Dimensional ◽  
Numerical Result ◽  
Pricing Formula

AbstractSince credit risk in the over-the-counter (OTC) market has undoubtedly become very important issue, credit risk has to be considered when the options in the OTC market are priced. In this paper, we consider the valuation of foreign equity options with credit risk. In order to derive a closed-form pricing formula of this option, we adopt the partial differential equation (PDE) approach and use the Mellin transform method to solve the PDE. Specifically, triple Mellin transforms are used, and the pricing formula is presented as 3-dimensional normal cumulative distribution functions. Finally, we verify that our closed-form formula is accurate by comparing it with the numerical result from the Monte-Carlo simulation.

scholarly journals On the Study of Reduced-Form Approach and Hybrid Model for the Valuation of Credit Risk

2015 ◽  
Vol 05 (02) ◽  
pp. 129-141
Author(s):  
Olaronke Helen Edogbanya ◽  
Sunday Emmanuel Fadugba
Keyword(s):  
Credit Risk ◽  
Hybrid Model ◽  
Reduced Form ◽  
Form Approach

scholarly journals A Probabilistic Approach to Aeropropulsion System Assessment

2000 ◽  
Author(s):  
Michael T. Tong
Keyword(s):  
Mechanical Design ◽  
Probability Distributions ◽  
Probabilistic Approach ◽  
Distribution Functions ◽  
Cumulative Distribution ◽  
Sensitivity Analyses ◽  
Turbine Engine ◽  
Technical Performance ◽  
Design Variables ◽  
System Assessment

A probabilistic approach is described for aeropropulsion system assessment. To demonstrate this approach, the technical performance of a wave rotor-enhanced gas turbine engine (i.e. engine net thrust, specific fuel consumption, and engine weight) is assessed. The assessment accounts for the uncertainties in component efficiencies/flows and mechanical design variables, using probability distributions. The results are presented in the form of cumulative distribution functions (CDFs) and sensitivity analyses, and are compared with those from the traditional deterministic approach. The comparison shows that the probabilistic approach provides a more realistic and systematic way to assess an aeropropulsion system.

COMPUTING BOUNDS ON RISK-NEUTRAL DISTRIBUTIONS FROM THE OBSERVED PRICES OF CALL OPTIONS

2010 ◽  
Vol 27 (02) ◽  
pp. 211-225
Author(s):  
MICHI NISHIHARA ◽  
MUTSUNORI YAGIURA ◽  
TOSHIHIDE IBARAKI
Keyword(s):  
Lower Bounds ◽  
Asset Price ◽  
Option Price ◽  
Distribution Functions ◽  
Cumulative Distribution ◽  
Upper And Lower Bounds ◽  
Underlying Asset ◽  
No Arbitrage ◽  
Call Options ◽  
Risk Neutral

This paper derives, in closed forms, upper and lower bounds on risk-neutral cumulative distribution functions of the underlying asset price from the observed prices of European call options, based only on the no-arbitrage assumption. The computed bounds from the option price data show that the gap between the upper and lower bounds is large near the underlying asset price but gets smaller away from the underlying asset price. Since the bounds can be easily computed and visualized, they could be practically used by investors in various ways.

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