A closed form solution for vulnerable options with Heston's stochastic volatility

作者：Lee Min Ku; Yang Sung Jin; Kim Jeong Hoon^*

来源：Chaos Solitons & Fractals, 2016, 86: 23-27.

DOI：10.1016/j.chaos.2016.01.026

• Vulnerable option
• Stochastic volatility
• Default risk
• Heston dynamics

Over-the-counter stock markets in the world have been growing rapidly and vulnerability to default risks of option holders traded in the over-the-counter markets became an important issue, in particular, since the global finance crisis and Eurozone crisis. This paper studies the pricing of European-type vulnerable options when the underlying asset follows the Heston dynamics. In this paper, we obtain a closed form analytic formula of the option price as a stochastic volatility extension of the classical Heston formula and find how the stochastic volatility effect on the Black-Scholes price as well as on the decreasing speed of the option price with credit risk depends on moneyness.

• 出版日期2016-5