CVA and vulnerable options in stochastic volatility models
From MaRDI portal
(Redirected from CVA and vulnerable options in stochastic volatility models)
Abstract: In this work we want to provide a general principle to evaluate the CVA (Credit Value Adjustment) for a vulnerable option, that is an option subject to some default event, concerning the solvability of the issuer. CVA is needed to evaluate correctly the contract and it is particularly important in presence of WWR (Wrong Way Risk), when a credit deterioration determines an increase of the claim's price. In particular, we are interested in evaluating the CVA in stochastic volatility models for the underlying's price (which often fit quite well the market's prices) when admitting correlation with the default event. By cunningly using Ito's calculus, we provide a general representation formula applicable to some popular models such as SABR, Hull & White and Heston, which explicitly shows the correction in CVA due to the processes correlation. Later, we specialize this formula and construct its approximation for the three selected models. Lastly, we run a numerical study to test the formula's accuracy, comparing our results with Monte Carlo simulations.
Recommendations
- CVA and vulnerable options pricing by correlation expansions
- CVA in fractional and rough volatility models
- Credit valuation adjustment of cap and floor with counterparty risk: a structural pricing model for vulnerable European options
- CVA with wrong way risk: sensitivities, volatility and hedging
- A subordinated CIR intensity model with application to wrong-way risk CVA
Cites work
- A closed form solution for vulnerable options with Heston's stochastic volatility
- A closed-form solution for options with stochastic volatility with applications to bond and currency options
- A comparison of biased simulation schemes for stochastic volatility models
- A decomposition formula for option prices in the Heston model and applications to option pricing approximation
- An Elementary Proof that the First Hitting Time of an Open Set by a Jump Process is a Stopping Time
- An essay on the general theory of stochastic processes
- Analytical pricing of vulnerable options under a generalized jump-diffusion model
- Analytical valuation of vulnerable options in a discrete-time framework
- Constructing Random Times with Given Survival Processes and Applications to Valuation of Credit Derivatives
- Counterparty risk and funding. A tale of two puzzles. With an introductory dialogue by Damiano Brigo
- Credit risk: Modelling, valuation and hedging
- Disentangling wrong-way risk: pricing credit valuation adjustment via change of measures
- scientific article; zbMATH DE number 5181830 (Why is no real title available?)
- Innovations in derivatives markets. Fixed income modeling, valuation adjustments, risk management, and regulation. Proceedings of the conference, Munich, Germany, March 30 -- April 1, 2015
- On Cox processes and credit risky securities
- On the martingale property of stochastic exponentials
- Pricing options under stochastic volatility: a power series approach
- Pricing vulnerable options with stochastic volatility
- RANDOM TIME FORWARD-STARTING OPTIONS
- Some extensions of Norros' lemma in models with several defaults
- The numerical solution of the American option pricing problem. Finite difference and transform approaches
Cited in
(11)- Pricing vulnerable options with stochastic volatility
- Valuing fade-in options with default risk in Heston-Nandi GARCH models
- CVA and vulnerable options pricing by correlation expansions
- Pricing vulnerable fader options under stochastic volatility models
- CVA in fractional and rough volatility models
- Credit valuation adjustment of cap and floor with counterparty risk: a structural pricing model for vulnerable European options
- Calculation of exposure profiles and sensitivities of options under the Heston and the Heston Hull-White models
- CONIC CVA AND DVA FOR OPTION PORTFOLIOS
- Wrong way risk corrections to CVA in CIR reduced-form models
- Pathwise CVA regressions with oversimulated defaults
- Valuation of options subject to default risk under a mixed fractional and multiscale stochastic volatility model
This page was built for publication: CVA and vulnerable options in stochastic volatility models
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q4994443)
