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 journalArticle

16 Citations (Scopus)

Abstract

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
Volume86
DOIs
Publication statusPublished - 2016 May 1

All Science Journal Classification (ASJC) codes

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

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