The Valuation of Options Subject to Default Risk Shen-Yuan Chen Department of Finance Ming Chuan University.

Slides:

Advertisements

Similar presentations

Hedging with Black and scholes Analytical Finance I Ellen Bjarnadóttir, Helga Daníelsdóttir and Koorosh Feizi.

Advertisements

© 2002 South-Western Publishing 1 Chapter 6 The Black-Scholes Option Pricing Model.

Bounding Option Prices Using Semidefinite Programming S ACHIN J AYASWAL Department of Management Sciences University of Waterloo, Canada Project work for.

Volatility Smiles Chapter 18 Options, Futures, and Other Derivatives, 7th Edition, Copyright © John C. Hull

P449. p450 Figure 15-1 p451 Figure 15-2 p453 Figure 15-2a p453.

Derivation of Black - Scholes Formula by Change of Time Method Anatoliy Swishchuk Mathematical and Computational Finance Laboratory, Department of Mathematics.

© 2002 South-Western Publishing 1 Chapter 6 The Black-Scholes Option Pricing Model.

Introduction. Direction of Study Investments Derivative Securities Options, Futures, Swaps, Synthetics Corporate Financial Strategies Corporate Challenges.

Valuation and Its Discontents Derivatives 2007 Emanuel Derman Prisma Capital Partners LP & Columbia University.

1 OPTIONS Call Option Put Option Option premium Exercise (striking) price Expiration date In, out-of, at-the-money options American vs European Options.

© K. Cuthbertson and D. Nitzsche Figures for Chapter 17 ASSET PRICE DYNAMICS (Financial Engineering : Derivatives and Risk Management)

D. M. ChanceAn Introduction to Derivatives and Risk Management, 6th ed.Ch. 1: 1 Chapter 1: Introduction The speed of money is faster than it’s ever been.

Fundamentals of Futures and Options Markets, 7th Ed, Ch 12, Copyright © John C. Hull 2010 Introduction to Binomial Trees Chapter 12 1.

Rene A. Carmona Bendheim Center for Finance Department of Operations Research & Financial Engineering Princeton University Portfolio Risk in the Electricity.

Impact of the introduction of the risk management products Dr. San-Lin Chung Department of Finance National Taiwan University.

Introduction to Credit Derivatives Uwe Fabich. Credit Derivatives 2 Outline  Market Overview  Mechanics of Credit Default Swap  Standard Credit Models.

Valuing Stock Options:The Black-Scholes Model

2Q | 2011 Guide to the Markets As of March 31, 2011.

Chapter 13 Financial Derivatives. Copyright © 2002 Pearson Education Canada Inc Spot, Forward, and Futures Contracts A spot contract is an agreement.

Delta Hedging & Greek NeutraL

Valuation and Risk Models By Shivgan Joshi

Seminar: Timely Topics for Today’s Business World Mr. Bernstein Correlation January 2015.

Black Scholes Option Pricing Model Finance (Derivative Securities) 312 Tuesday, 10 October 2006 Readings: Chapter 12.

Concept of Valuation Convertibles It is a financial security with Call Option to buy shares, of the issuer.

© 2004 Pearson Addison-Wesley. All rights reserved 13-1 Hedging Hedge: engage in a financial transaction that reduces or eliminates risk Basic hedging.

Functional Ito Calculus and PDE for Path-Dependent Options Bruno Dupire Bloomberg L.P. PDE and Mathematical Finance KTH, Stockholm, August 19, 2009.

A different kind of Tree Using trees to help price options. Using trees to help price options. Some of the ideas behind Black-Scholes. Some of the ideas.

Properties of Stock Option Prices Chapter 9. Notation c : European call option price p :European put option price S 0 :Stock price today K :Strike price.

Lecture 18. Option Valuation Methods  Genentech call options have an exercise price of $80 and expire in one year. Case 1 Stock price falls to $60 Option.

1 Foreign Currency Derivatives Markets International Financial Management Dr. A. DeMaskey.

11.1 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull Volatility Problem Suppose that observations on a stock price (in.

Chapter 22 Principles PrinciplesofCorporateFinance Ninth Edition Valuing Options Slides by Matthew Will Copyright © 2008 by The McGraw-Hill Companies,

Chapter 21 Principles of Corporate Finance Tenth Edition Valuing Options Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies,

13.1 Valuing Stock Options : The Black-Scholes-Merton Model Chapter 13.

Introduction to risk and return

Chapter 19 An Introduction to Options. Define the Following Terms n Call Option n Put Option n Intrinsic Value n Exercise (Strike) Price n Premium n Time.

DERIVATIVES. Introduction Cash market strategies are limited Long (asset is expected to appreciate) Short (asset is expected to depreciate) Alternative.

Introduction to Derivatives

Capital Markets Course 1. Capital Markets- Introduction Assessment: 40% seminar assessment 60% final assessment Bibliography: Anghelache, G., Piaţa de.

Chance/BrooksAn Introduction to Derivatives and Risk Management, 8th ed.Ch. 1: 1 Chapter 1: Introduction It is only by risking our persons from one hour.

Chapter 15 Mark to Market w Understand advantages and disadvantages of historical cost. w Identify factors that led to the emphasis on mark to market.

Financed by a grant from Switzerland through the Swiss Contribution to the enlarged European Union Poland Financial Reporting Technical Assistance Program.

Applications of Stochastic Processes in Asset Price Modeling Preetam D’Souza.

Binomial Trees Chapter 11

Black-Scholes Model for European vanilla options

Chapter 21 Valuing Options Principles of Corporate Finance

Binomial Trees in Practice

Introduction to Binomial Trees

Chapter 12 Binomial Trees

Chapter 18 Valuing Options Principles of Corporate Finance

INTEREST RATE DERIVATIVE MARKETS

Chapter 7: Beyond Black-Scholes

FTCS Explicit Finite Difference Method for Evaluating European Options

Structured Banking Product: Option and Deposit

Pricing Barrier Options Using Monte Carlo Simulation

How Traders Manage Their Risks

Title of the Poster Authors Affiliation / Organization 1. Introduction

Chapter 13 Binomial Trees

التصكيك في الأسواق المالية: حالة صكوك الإجارة نظرة فقهية واقتصادية

بعض النقاط التي تؤخذ في الحسبان عند تقييم الاستثمارات الزراعية

01 דצמבר 18.

Binomial Trees in Practice

© K. Cuthbertson and D. Nitzsche

Title of Study Presenter names Major department names

Binomial Trees Chapter 11

Figure Overview.

~ Investment Management ~

Integrated Risk Management

Chapter 13 Binomial Trees

Presentation transcript:

The Valuation of Options Subject to Default Risk Shen-Yuan Chen Department of Finance Ming Chuan University

Vulnerable OptionShen-Yuan Chen2 Introduction Exchange-listed Options v.s. Unlisted (OTC) Options →Default Risk of the Issuer → Vulnerable option

Vulnerable OptionShen-Yuan Chen3 Purpose Extend Klein (1996) vulnerable option pricing model Derive a path-dependent valuation model for vulnerable option

Vulnerable OptionShen-Yuan Chen4

Vulnerable OptionShen-Yuan Chen5 Klein (1996) Model

Vulnerable OptionShen-Yuan Chen6 Path-Independent vs Path-Dependent Vulnerable Options

Vulnerable OptionShen-Yuan Chen7 Path-Dependent Vulnerable Options Valuation Model

Vulnerable OptionShen-Yuan Chen8 Comparison of Alternative Pricing Models Path-Dependent Vulnerable Option Klein(1996) Black & Scholes (1973) →Tables 1 : Base Case →Tables 2 : V = 10 →Tables 3 : V = 8

Vulnerable OptionShen-Yuan Chen9

Vulnerable OptionShen-Yuan Chen10

Vulnerable OptionShen-Yuan Chen11

Vulnerable OptionShen-Yuan Chen12 Sensitivity Analysis → Figure 1 : Counterparty’s asset value → Figure 2 : Volatility of counterparty’s asset value → Figure 3 : Coefficient of correlation → Figures 4 - 7

Vulnerable OptionShen-Yuan Chen13

Vulnerable OptionShen-Yuan Chen14

Vulnerable OptionShen-Yuan Chen15

Vulnerable OptionShen-Yuan Chen16

Vulnerable OptionShen-Yuan Chen17

Vulnerable OptionShen-Yuan Chen18

Vulnerable OptionShen-Yuan Chen19 Conclusions Klein (1996) overestimates vulnerable option value Counterparty’s asset value ↑→ PDVO ↑ Volatility of counterparty’s asset ↑ → PDVO↓ Correlation between counterparty’s asset and underlying stock ↑→ PDVO ？