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The Valuation of Power Exchange Options with Counterparty Risk and Jump Risk

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  • Xingchun Wang
  • Shiyu Song
  • Yongjin Wang

Abstract

This study presents a pricing model for power exchange options, in which the possibility of default by the risky counterparty as well as the arrival of important business information are taken into consideration. The idiosyncratic and common jump components induced by the arrival of business information are subsumed into all asset price processes whose dynamics are correlated with each other. Employing the measure‐change technique, we obtain a pricing formula for the values of power exchange options with counterparty risk. At last, based on the derived formula, we numerically analyze the impacts of counterparty risk and jump risk on option prices. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:499–521, 2017

Suggested Citation

  • Xingchun Wang & Shiyu Song & Yongjin Wang, 2017. "The Valuation of Power Exchange Options with Counterparty Risk and Jump Risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 37(5), pages 499-521, May.
    • Handle: RePEc:wly:jfutmk:v:37:y:2017:i:5:p:499-521
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    Cited by:

    1. Wang, Guanying & Wang, Xingchun & Shao, Xinjian, 2022. "Exchange options for catastrophe risk management," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    2. Zonggang Ma & Chaoqun Ma & Zhijian Wu, 2022. "Pricing commodity-linked bonds with stochastic convenience yield, interest rate and counterparty credit risk: application of Mellin transform methods," Review of Derivatives Research, Springer, vol. 25(1), pages 47-91, April.
    3. Jeon, Junkee & Kim, Geonwoo, 2019. "Pricing of vulnerable options with early counterparty credit risk," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 645-656.
    4. Xingchun Wang, 2020. "Analytical valuation of Asian options with counterparty risk under stochastic volatility models," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(3), pages 410-429, March.
    5. Wang, Xingchun, 2020. "Pricing options on the maximum or minimum of multi-assets under jump-diffusion processes," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 16-26.
    6. Geonwoo Kim, 2020. "Valuation of Exchange Option with Credit Risk in a Hybrid Model," Mathematics, MDPI, vol. 8(11), pages 1-11, November.
    7. Xingchun Wang, 2021. "Pricing vulnerable options with jump risk and liquidity risk," Review of Derivatives Research, Springer, vol. 24(3), pages 243-260, October.
    8. Xu, Guangli & Shao, Xinjian & Wang, Xingchun, 2019. "Analytical valuation of power exchange options with default risk," Finance Research Letters, Elsevier, vol. 28(C), pages 265-274.
    9. Ziming Dong & Dan Tang & Xingchun Wang, 2023. "Pricing vulnerable basket spread options with liquidity risk," Review of Derivatives Research, Springer, vol. 26(1), pages 23-50, April.
    10. Wang, Xingchun, 2022. "Pricing vulnerable options with stochastic liquidity risk," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).
    11. Wang, Heqian & Zhang, Jiayi & Zhou, Ke, 2022. "On pricing of vulnerable barrier options and vulnerable double barrier options," Finance Research Letters, Elsevier, vol. 44(C).
    12. Afhami, Bahareh & Rezapour, Mohsen & Madadi, Mohsen & Maroufy, Vahed, 2023. "A comonotonic approximation to optimal terminal wealth under a multivariate Merton model with correlated jump risk," Applied Mathematics and Computation, Elsevier, vol. 444(C).
    13. Wang, Xingchun, 2019. "Valuation of new-designed contracts for catastrophe risk management," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    14. Li, Zelei & Wang, Xingchun, 2020. "Valuing spread options with counterparty risk and jump risk," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).

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