East Asian mathematical journal

The Youngnam Mathematical Society (영남수학회)
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PRICING VULNERABLE POWER OPTION UNDER A CEV DIFFUSION

  • Ha, Mijin (Department of Mathematics, Pusan National University) ;
  • Kim, Donghyun (Department of Mathematics, Pusan National University) ;
  • Yoon, Ji-Hun (Department of Mathematics, Pusan National University)
  • Received : 2021.05.03
  • Accepted : 2021.09.16
  • Published : 2021.09.30
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Abstract

In the over-the-counter market, option's buyers could have a problem for default risk caused by option's writers. In addition, many participants try to maximize their benefits obviously in investing the financial derivatives. Taking all these circumstances into consideration, we deal with the vulnerable power options under a constant elasticity variance (CEV) model. We derive an analytic pricing formula for the vulnerable power option by using the asymptotic analysis, and then we verify that the analytic formula can be obtained accurately by comparing our solution with Monte-Carlo price. Finally, we examine the effect of CEV on the option price based on the derived solution.

Keywords

Acknowledgement

This work was supported by a 2-Year Research Grant of Pusan National University.

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