The martingale approach for vulnerable binary option pricing under stochastic interest rate

Cogent Mathematics

Guoxiang Liu¹  Quanxin Zhu¹  Zhaowei Yan¹ 

[1] Nanjing Normal University;

关键词: O-U process;    vulnerable binary option;    option pricing;    change of measure;    stochastic interest rate;    martingale approach;   

DOI  :  10.1080/23311835.2017.1340073

来源: DOAJ

【 摘 要 】

We consider the vulnerable option pricing problem when the stochastic interest rate is driven by a Hull-White model. Based on the firm value model, we suppose that the stock prices, assets and liabilities of a company follow the relevant O-U processes. We adopt the martingale approach to determine the equivalent martingale measure for pricing the vulnerable binary option, the analytical pricing formula of the vulnerable binary options is derived.

【 授权许可】

Unknown