Pricing vulnerable options with stochastic volatility

DOI10.1016/J.PHYSA.2017.04.146MaRDI QIDQ2147889zbMATH OpenOpenAlexFDO

Authors Guanying Wang, Xingchun Wang, Ke Zhou

Publication date 20 June 2022

Published in Physica A (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1016/j.physa.2017.04.146

zbMATH Keywords

credit riskOTC marketsstochastic volatilityvulnerable options

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Credit risk (91G40) Numerical methods (including Monte Carlo methods) (91G60)

Review text

The authors investigate the pricing issue of vulnerable options with stochastic volatility by decomposing stochastic volatility into the long-term and short-term volatility. The short-term fluctuation of stochastic volatility is modeled by a mean-reverting process, and the long-term volatility is supposed to be a constant. Based on the proposed model, a pricing formula of vulnerable options is derived in a special case. Numerical results are presented to illustrate the impacts of two stochastic volatility components on vulnerable option prices.

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Cited in

(48)

• Pricing and hedging vulnerable option with funding costs and collateral
• Pricing vulnerable European options under Lévy process with stochastic volatility
• Pricing VXX option with default risk and positive volatility skew
• Analytical valuation of vulnerable European and Asian options in intensity-based models
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• Pricing vulnerable options with jump risk and liquidity risk
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