Analytical valuation of vulnerable European and Asian options in intensity-based models (Q2020536)

The author investigates European and Asian options with default risk in an intensity-based model. By breaking down the risk into idiosyncratic and systematic components, the underlying asset price is described by a two-factor stochastic volatility model and incorporate the correlation between the underlying asset and default risk. The main result provides pricing formulae of European and Asian options with default risk and illustrate the effects of default risk and systematic risk on option prices: prices of the options with default risk increase with systematic risk; and prices of the options with default risk drop as systematic risk increases when the total initial volatility of the underlying asset is kept unchanged.