The Valuation of Options Subject to Default Risk
This presentation is the property of its rightful owner.
Sponsored Links
1 / 19

The Valuation of Options Subject to Default Risk Shen-Yuan Chen Department of Finance PowerPoint PPT Presentation


  • 54 Views
  • Uploaded on
  • Presentation posted in: General

The Valuation of Options Subject to Default Risk Shen-Yuan Chen Department of Finance Ming Chuan University. Introduction. Exchange-listed Options v.s. Unlisted (OTC) Options →Default Risk of the Issuer → Vulnerable option. Purpose.

Download Presentation

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

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


The valuation of options subject to default risk shen yuan chen department of finance

The Valuation of Options Subject to Default Risk

Shen-Yuan Chen

Department of Finance

Ming Chuan University


Introduction

Introduction

Exchange-listed Options

v.s.

Unlisted (OTC) Options

→Default Risk of the Issuer

→ Vulnerable option

Shen-Yuan Chen


The valuation of options subject to default risk shen yuan chen department of finance

Purpose

Extend Klein (1996) vulnerable option pricing model

Derive a path-dependent valuation model for vulnerable option

Shen-Yuan Chen


The valuation of options subject to default risk shen yuan chen department of finance

Shen-Yuan Chen


The valuation of options subject to default risk shen yuan chen department of finance

Klein (1996) Model

Shen-Yuan Chen


The valuation of options subject to default risk shen yuan chen department of finance

Path-Independent vs Path-Dependent Vulnerable Options

Shen-Yuan Chen


Path dependent vulnerable options valuation model

Path-Dependent Vulnerable Options Valuation Model

Shen-Yuan Chen


Comparison of alternative pricing models

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

Shen-Yuan Chen


The valuation of options subject to default risk shen yuan chen department of finance

Shen-Yuan Chen


The valuation of options subject to default risk shen yuan chen department of finance

Shen-Yuan Chen


The valuation of options subject to default risk shen yuan chen department of finance

Shen-Yuan Chen


Sensitivity analysis

Sensitivity Analysis

→ Figure 1 : Counterparty’s asset value

→ Figure 2 : Volatility of counterparty’s asset value

→ Figure 3 : Coefficient of correlation

→ Figures 4 - 7

Shen-Yuan Chen


The valuation of options subject to default risk shen yuan chen department of finance

Shen-Yuan Chen


The valuation of options subject to default risk shen yuan chen department of finance

Shen-Yuan Chen


The valuation of options subject to default risk shen yuan chen department of finance

Shen-Yuan Chen


The valuation of options subject to default risk shen yuan chen department of finance

Shen-Yuan Chen


The valuation of options subject to default risk shen yuan chen department of finance

Shen-Yuan Chen


The valuation of options subject to default risk shen yuan chen department of finance

Shen-Yuan Chen


Conclusions

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 ?

Shen-Yuan Chen


  • Login