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PRICING VULNERABLE AMERICAN PUT OPTIONS UNDER JUMP–DIFFUSION PROCESSES

Published online by Cambridge University Press:  14 December 2016

Guanying Wang ,
Xingchun Wang  and
Zhongyi Liu
Guanying Wang
Affiliation:
College of Management and Economics, Tianjin University, Tianjin, China Key Laboratory of Computation and Analytics of Complex Management Systems (CACMS), Tianjin, China E-mail: [email protected]
Xingchun Wang
Affiliation:
School of International Trade and Economics, University of International Business and Economics, Beijing, China E-mail: [email protected]
Zhongyi Liu
Affiliation:
School of Management, People's Public Security University of China, Beijing, China E-mail: [email protected]
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Abstract

This paper evaluates vulnerable American put options under jump–diffusion assumptions on the underlying asset and the assets of the counterparty. Sudden shocks on the asset prices are described as a compound Poisson process. Analytical pricing formulae of vulnerable European put options and vulnerable twice-exercisable European put options are derived. Employing the two-point Geske and Johnson method, we derive an approximate analytical pricing formula of vulnerable American put options under jump–diffusions. Numerical simulations are performed for investigating the impacts of jumps and default risk on option prices.

Keywords

credit riskjump–diffusion processesmulti-exercisable optionsvulnerable american options
Type
Research Article
Information
Probability in the Engineering and Informational Sciences , Volume 31 , Issue 2 , April 2017 , pp. 121 - 138
Copyright
Copyright © Cambridge University Press 2016 

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