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Explicit formula for the valuation of catastrophe put option with exponential jump and default risk

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  • Koo, Eunho
  • Kim, Geonwoo

Abstract

This paper concerns a catastrophe put option with default risk. Catastrophe events are described by the exponential jump model, and the default event of the option issuer is specified by the intensity based model with a stochastic intensity. Under this model, we derive the explicit analytical pricing formula of a catastrophe put option with default risk by using the multidimensional Girsanov theorem repeatedly. We also observe the effects of default risk on the prices of a catastrophe put option through the numerical experiment.

Suggested Citation

  • Koo, Eunho & Kim, Geonwoo, 2017. "Explicit formula for the valuation of catastrophe put option with exponential jump and default risk," Chaos, Solitons & Fractals, Elsevier, vol. 101(C), pages 1-7.
    • Handle: RePEc:eee:chsofr:v:101:y:2017:i:c:p:1-7
    DOI: 10.1016/j.chaos.2017.05.012
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    Cited by:

    1. Junkee Jeon & Geonwoo Kim, 2021. "Power Exchange Option with a Hybrid Credit Risk under Jump-Diffusion Model," Mathematics, MDPI, vol. 10(1), pages 1-12, December.
    2. Junkee Jeon & Geonwoo Kim, 2023. "Valuation of Commodity-Linked Bond with Stochastic Convenience Yield, Stochastic Volatility, and Credit Risk in an Intensity-Based Model," Mathematics, MDPI, vol. 11(24), pages 1-11, December.
    3. Junkee Jeon & Geonwoo Kim, 2024. "Analytically Pricing a Vulnerable Option under a Stochastic Liquidity Risk Model with Stochastic Volatility," Mathematics, MDPI, vol. 12(17), pages 1-16, August.
    4. Jeon, Jaegi & Kim, Geonwoo & Huh, Jeonggyu, 2021. "An asymptotic expansion approach to the valuation of vulnerable options under a multiscale stochastic volatility model," Chaos, Solitons & Fractals, Elsevier, vol. 144(C).
    5. Zaevski, Tsvetelin S. & Kounchev, Ognyan & Savov, Mladen, 2019. "Two frameworks for pricing defaultable derivatives," Chaos, Solitons & Fractals, Elsevier, vol. 123(C), pages 309-319.
    6. Geonwoo Kim, 2020. "Valuation of Exchange Option with Credit Risk in a Hybrid Model," Mathematics, MDPI, vol. 8(11), pages 1-11, November.

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