Indifference pricing with counterparty risk

Bulletin of the Polish Academy of Sciences. Technical Sciences

T. NguyenJohn von Neumann Institute-Vietnam National University, VNU IT Park, Linh Trung Ward, Thu Duc District, HCMC, Viet NamOther articles by this author:De Gruyter OnlineGoogle Scholar¹  M. NgoJohn von Neumann Institute-Vietnam National University, VNU IT Park, Linh Trung Ward, Thu Duc District, HCMC, Viet NamOther articles by this author:De Gruyter OnlineGoogle Scholar¹  T. DuongCorresponding authorJohn von Neumann Institute-Vietnam National University, VNU IT Park, Linh Trung Ward, Thu Duc District, HCMC, Viet NamEmailOther articles by this author:De Gruyter OnlineGoogle Scholar¹ 

[1] John von Neumann Institute-Vietnam National University, VNU IT Park, Linh Trung Ward, Thu Duc District, HCMC, Viet Nam

关键词: Keywords: indifference pricing;    counterparty risk;    minimal entropy;    BSDE;   

DOI  :  10.1515/bpasts-2017-0074

学科分类：工程和技术（综合）

来源: Polska Akademia Nauk * Centrum Upowszechniania Nauki / Polish Academy of Sciences, Center for the Advancement of Science

【 摘 要 】

We present counterparty risk by a jump in the underlying price and a structural change of the price process after the default of the counterparty. The default time is modeled by a default-density approach. Then we study an exponential utility-indifference price of an European option whose underlying asset is exposed to this counterparty risk. Utility-indifference pricing method normally consists in solving two optimization problems. However, by using the minimal entropy martingale measure, we reduce to solving just one optimal control problem. In addition, to overcome the incompleteness obstacle generated by the possible jump and the change in structure of the price process, we employ the BSDE-decomposition approach in order to decompose the problem into a global-before-default optimal control problem and an after-default one. Each problem works in its own complete framework. We demonstrate the result by numerical simulation of an European option price under the impact of jump’s size, intensity of the default, absolute risk aversion and change in the underlying volatility.

【 授权许可】

Unknown