A closed form solution for vulnerable options with Heston's stochastic volatility

Min Ku Lee, Sung Jin Yang, Jeong Hoon Kim

Research output: Contribution to journalArticlepeer-review

32 Citations (Scopus)


Over-the-counter stock markets in the world have been growing rapidly and vulnerability to default risks of option holders traded in the over-the-counter markets became an important issue, in particular, since the global finance crisis and Eurozone crisis. This paper studies the pricing of European-type vulnerable options when the underlying asset follows the Heston dynamics. In this paper, we obtain a closed form analytic formula of the option price as a stochastic volatility extension of the classical Heston formula and find how the stochastic volatility effect on the Black-Scholes price as well as on the decreasing speed of the option price with credit risk depends on moneyness.

Original languageEnglish
Pages (from-to)23-27
Number of pages5
JournalChaos, Solitons and Fractals
Publication statusPublished - 2016 May 1

Bibliographical note

Funding Information:
The research of J.-H. Kim was supported by the National Research Foundation of Korea NRF-2013R1A1A2A10006693 .

Publisher Copyright:
© 2016 Elsevier Ltd.

All Science Journal Classification (ASJC) codes

  • Statistical and Nonlinear Physics
  • Mathematics(all)
  • Physics and Astronomy(all)
  • Applied Mathematics


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