Asian options with credit risks: Pricing and sensitivity analysis

Chueh Yung Tsao; Chao Ching Liu

doi:10.2753/REE1540-496X4805S306

Asian options with credit risks: Pricing and sensitivity analysis

Chueh Yung Tsao^*
, Chao Ching Liu

^*Corresponding author for this work

Chang Gung University

Research output: Contribution to journal › Journal Article › peer-review

10 Scopus citations

Abstract

The 2008 financial crisis forced investors to be more concerned with the risk management of financial instruments, especially derivatives. The main objective of this paper is to study the effect of issuer credit risk on the pricing of options. In particular, we focus on Asian options, which are options traded in the over-the-counter market. The contribution of this study is two-fold. We first derive the approximation formula for the arithmetic Asian option subject to issuer credit risk. We then study how the contract designs and the issuers' characteristics affect the credit discount of Asian options.

Original language	English
Pages (from-to)	96-115
Number of pages	20
Journal	Emerging Markets Finance and Trade
Volume	48
DOIs	https://doi.org/10.2753/REE1540-496X4805S306
State	Published - 01 09 2012

Bibliographical note

Publisher Copyright:
© 2012 M.E. Sharpe, Inc. All rights reserved.

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 10 Reduced Inequalities

Keywords

Asian option
arithmetic average
credit risk
vulnerable option

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10.2753/REE1540-496X4805S306

Cite this

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abstract = "The 2008 financial crisis forced investors to be more concerned with the risk management of financial instruments, especially derivatives. The main objective of this paper is to study the effect of issuer credit risk on the pricing of options. In particular, we focus on Asian options, which are options traded in the over-the-counter market. The contribution of this study is two-fold. We first derive the approximation formula for the arithmetic Asian option subject to issuer credit risk. We then study how the contract designs and the issuers' characteristics affect the credit discount of Asian options.",

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AB - The 2008 financial crisis forced investors to be more concerned with the risk management of financial instruments, especially derivatives. The main objective of this paper is to study the effect of issuer credit risk on the pricing of options. In particular, we focus on Asian options, which are options traded in the over-the-counter market. The contribution of this study is two-fold. We first derive the approximation formula for the arithmetic Asian option subject to issuer credit risk. We then study how the contract designs and the issuers' characteristics affect the credit discount of Asian options.

KW - Asian option

KW - arithmetic average

KW - credit risk

KW - vulnerable option

UR - https://www.scopus.com/pages/publications/84918502604

U2 - 10.2753/REE1540-496X4805S306

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SN - 1540-496X

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EP - 115

JO - Emerging Markets Finance and Trade

JF - Emerging Markets Finance and Trade

ER -

Asian options with credit risks: Pricing and sensitivity analysis

Abstract

Bibliographical note

UN SDGs

Keywords

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