Work

Analytical Valuation of Vulnerable Exchange Options with Stochastic Volatility in a Reduced-Form Model

Year: 2024

Type: article

Abstract: This paper investigates the valuation of vulnerable exchange options with two underlying assets that follow a two-factor volatility model. We employ a reduced-form model incorporating a Poisson process with stochastic intensity. The proposed reduced-form model depends on a stochastic intensity process that is guaranteed to remain positive and includes both systemic and idiosyncratic risks. Using measure change techniques and characteristic functions, we obtain an explicit pricing formula for vulnerable exchange options within the proposed framework. We also provide numerical examples demonstrating the sensitivity of option prices to significant parameters.

Source: Mathematics

DOI: 10.3390/math12243879

Authors: Junkee Jeon, Geonwoo Kim

Institutions: Kyung Hee University, Seoul National University of Science and Technology

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: gold

Estimated APC paid: $2,955

Funder: Seoul National University of Science and Technology