The pricing of Asian options with default risk

Chueh Yung Tsao*, Chao Ching Li

*Corresponding author for this work

Research output: Contribution to journalJournal Article peer-review

Abstract

Owing to the fact that the over-the-counter (OTC) market has no organized exchange, the options traded in the OTC market are more likely to be exposed to credit risk, Asian options being one of them. In this chapter we first discuss the pricing of geometric Asian options and the Black-Scholes options model subject to credit risk. We then combine the two models to derive a closed-form formula for pricing a geometric Asian option subject to the credit risk. The numerical analysis reveals that other pricing formulae existing in the literature can cause serious pricing errors when there is a possibility of default in reality.

Original languageEnglish
Pages (from-to)343-369
Number of pages27
JournalResearch in Finance
Volume25
StatePublished - 2009

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