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The Pricing of Two Newly Invented Swaps in a Jump-Diffusion Model

Author

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  • Zhaojun Yang

    (Department of Financial Engineering, Hunan University)

  • Chunhong Zhang

    (Department of Financial Engineering, Hunan University)

Abstract

This paper considers the pricing of contingent claims involved in two new swaps invented by Chinese entrepreneurs, the equity-for-guarantee swap (EGS) and the option-for-guarantee swap (OGS), when the cash flow of a firm that enters into the swaps follows a jump-diffusion process with jump sizes having a double exponential distribution. Using an equilibrium pricing approach, we provide explicit prices of all contingent claims and guarantee costs, where a Nash equilibrium of the game between the insurer and the borrower is derived. We present numerical analysis and find that OGS leads to an earlier default than EGS. As far as the borrower is concerned, EGS is better than OGS while keeping other parties the same. The advantage increases dramatically with the cash flow risk.

Suggested Citation

  • Zhaojun Yang & Chunhong Zhang, 2015. "The Pricing of Two Newly Invented Swaps in a Jump-Diffusion Model," Annals of Economics and Finance, Society for AEF, vol. 16(2), pages 371-392, November.
    • Handle: RePEc:cuf:journl:y:2015:v:16:i:2:yang
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    References listed on IDEAS

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    Cited by:

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    10. Yanping Cai & Zhaojun Yang & Zhiming Zhao, 2019. "Contingent capital with repeated interconversion between debt‐ and equity‐like instruments," European Financial Management, European Financial Management Association, vol. 25(2), pages 358-379, March.

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    More about this item

    Keywords

    Option-for-guarantee swap; Equity-for-guarantee swap; Guarantee costs; Nash equilibrium;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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