Pricing vulnerable power exchange options in an intensity based framework

JOURNAL OF COMPUTATIONAL AND APPLIED MATHEMATICS

卷:355

Article

Pasricha, Puneet¹  Goel, Anubha¹ 

[1] Indian Inst Technol Delhi, Dept Math, New Delhi 110016, India

关键词: Power exchange options;    Credit risk;    Doubly stochastic Poisson process;    Default;   

DOI  :  10.1016/j.cam.2019.01.019

来源: Elsevier

【 摘 要 】

In this article, we study the valuation of a European vulnerable power exchange option in an intensity based framework. We assume that the default by the counter-party is the time of the first jump of a doubly stochastic Poisson process whose intensity is modeled by a jump-diffusion process. The dynamics of the two assets are assumed to be driven by correlated jump-diffusion processes. All the three processes are assumed to be correlated in continuous part as well as in the jump part. In the proposed framework, employing the measure-change technique, we obtain the explicit formula for the price of the power exchange option with counter-party risk. Furthermore, sensitivity analysis is given to illustrate the effects of counterparty risk on the price of the option and effect of various parameters on the option prices. (C) 2019 Elsevier B.V. All rights reserved.

【 授权许可】

Free