Pricing of Fixed-Strike Lookback Options on Assets with Default Risk

In over-the-counter markets, many options on defaultable instruments are influenced by default risks emanating from the possibility that the option writer may not fulfill its contractual obligations. In this paper, we investigate the valuation of fixed-strike lookback options based on the issuer’s c...

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Bibliographic Details
Published in:Mathematical problems in engineering 2019-01, Vol.2019 (2019), p.1-10
Main Authors: Choi, Sun-Yong, Jeon, Junkee, Yoon, Ji-Hun
Format: Article
Language:English
Subjects:
Applied mathematics
Closed form solutions
Computer simulation
Default
Derivatives
Economic models
Engineering
Exact solutions
Finite difference method
Interest rates
International finance
Laplace transforms
Mellin transforms
Method of images
Over the counter trading
Partial differential equations
Risk analysis
Securities prices
Volatility
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Summary:In over-the-counter markets, many options on defaultable instruments are influenced by default risks emanating from the possibility that the option writer may not fulfill its contractual obligations. In this paper, we investigate the valuation of fixed-strike lookback options based on the issuer’s credit risk. Using double Mellin transforms and the method of images, we have a closed-form solution to fixed-strike lookback options with a default risk. Furthermore, we analyze the values of the vulnerable fixed-strike lookback options with respect to the model parameters and also show that the Monte Carlo simulations and the Implicit Finite Difference Method converge to the closed-form solutions and this verifies the correctness of our formulas.
ISSN:1024-123X
1563-5147
DOI:10.1155/2019/8412698