Work

On the pricing of vulnerable Parisian options

Year: 2024

Type: article

Abstract: Parisian options, serving as substitutes for barrier options, are frequently embedded in complex financial derivatives. Despite the considerable mathematical challenges in pricing , their significant applications in finance and insurance have generated extensive studies in the literature. However, the impact of counterparty risk has not been taken into account so far. To address this gap, we develop a closed-form pricing framework for vulnerable Parisian options. Utilizing the Laplace transform and measure-change technique, we derive closed-form pricing formulas of Parisian options incorporating counterparty credit risk. Finally, we conduct numerical analyses to verify our pricing formulas’ accuracy and efficiency.

Source: Finance research letters

DOI: 10.1016/j.frl.2024.105995

Authors: Zheng Liu, Dongchen Li, Linyi Qian, Jing Yao

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,350

Funders: National Natural Science Foundation of China, National University's Basic Research Foundation of China, Fundamental Research Funds for the Central Universities

Awards: G3935064645, G5066383776, G5933003684, G8430656668