The pricing of vulnerable options with double Mellin transforms

Ji Hun Yoon; Jeong Hoon Kim

doi:10.1016/j.jmaa.2014.09.015

The pricing of vulnerable options with double Mellin transforms

Ji Hun Yoon, Jeong Hoon Kim

Department of Mathematics

Research output: Contribution to journal › Article › peer-review

51 Citations (Scopus)

Abstract

Many options traded in the over-the-counter markets are subject to default risks resulting from the probability that the option writer could not honor its contractual obligations. There have been growing concerns about financial derivatives subject to default risks, in particular, since the Global Financial Crisis and Eurozone crisis. This paper uses double Mellin transforms to study European vulnerable options under constant as well as stochastic (the Hull-White) interest rates. We obtain explicitly an analytic closed form pricing formula in each interest rate case so that the pricing of the options can be computed both accurately and efficiently.

Original language	English
Pages (from-to)	838-857
Number of pages	20
Journal	Journal of Mathematical Analysis and Applications
Volume	422
Issue number	2
DOIs	https://doi.org/10.1016/j.jmaa.2014.09.015
Publication status	Published - 2015 Feb 15

Bibliographical note

Funding Information:
The authors thank an anonymous referee for valuable comments on the improvement of the paper. The research of J.-H. Yoon was supported by BK21 PLUS SNU Mathematical Sciences Division and the research of J.-H. Kim was supported by the National Research Foundation of Korea NRF-2013R1A1A2A10006693 .

Publisher Copyright:
© 2014 Elsevier Inc.

All Science Journal Classification (ASJC) codes

Analysis
Applied Mathematics

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10.1016/j.jmaa.2014.09.015

Cite this

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abstract = "Many options traded in the over-the-counter markets are subject to default risks resulting from the probability that the option writer could not honor its contractual obligations. There have been growing concerns about financial derivatives subject to default risks, in particular, since the Global Financial Crisis and Eurozone crisis. This paper uses double Mellin transforms to study European vulnerable options under constant as well as stochastic (the Hull-White) interest rates. We obtain explicitly an analytic closed form pricing formula in each interest rate case so that the pricing of the options can be computed both accurately and efficiently.",

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AB - Many options traded in the over-the-counter markets are subject to default risks resulting from the probability that the option writer could not honor its contractual obligations. There have been growing concerns about financial derivatives subject to default risks, in particular, since the Global Financial Crisis and Eurozone crisis. This paper uses double Mellin transforms to study European vulnerable options under constant as well as stochastic (the Hull-White) interest rates. We obtain explicitly an analytic closed form pricing formula in each interest rate case so that the pricing of the options can be computed both accurately and efficiently.

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The pricing of vulnerable options with double Mellin transforms

Abstract

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