IDEAS home Printed from https://ideas.repec.org/a/gam/jmathe/v10y2021i1p53-d710387.html
   My bibliography  Save this article

Power Exchange Option with a Hybrid Credit Risk under Jump-Diffusion Model

Author

Listed:
  • Junkee Jeon

    (Department of Applied Mathematics & Institute of Natural Science, Kyung Hee University, Seoul 17104, Korea)

  • Geonwoo Kim

    (School of Liberal Arts, Seoul National University of Science and Technology, Seoul 01811, Korea)

Abstract

In this paper, we study the valuation of power exchange options with a correlated hybrid credit risk when the underlying assets follow the jump-diffusion processes. The hybrid credit risk model is constructed using two credit risk models (the reduced-form model and the structural model), and the jump-diffusion processes are proposed based on the assumptions of Merton. We assume that the dynamics of underlying assets have correlated continuous terms as well as idiosyncratic and common jump terms. Under the proposed model, we derive the explicit pricing formula of the power exchange option using the measure change technique with multidimensional Girsanov’s theorem. Finally, the formula is presented as the normal cumulative functions and the infinite sums.

Suggested Citation

  • 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.
    • Handle: RePEc:gam:jmathe:v:10:y:2021:i:1:p:53-:d:710387
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7390/10/1/53/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-7390/10/1/53/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Geonwoo Kim, 2020. "Valuation of Exchange Option with Credit Risk in a Hybrid Model," Mathematics, MDPI, vol. 8(11), pages 1-11, November.
    2. 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).
    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. Zaevski, Tsvetelin S. & Kounchev, Ognyan & Savov, Mladen, 2019. "Two frameworks for pricing defaultable derivatives," Chaos, Solitons & Fractals, Elsevier, vol. 123(C), pages 309-319.
    5. 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.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jmathe:v:10:y:2021:i:1:p:53-:d:710387. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.