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Date of Publication:2011-01-01

Journal:大连理工大学学报

Volume:51

Issue:6

Page Number:922-926

ISSN No.:1000-8608

Abstract:The problem of counterparty correlated default risk existing in the
   pricing of vulnerable European call option is investigated. Firstly, the
   looping default intensity model under coexistence of counterparty credit
   risk between the situation of mutual influence and market risk is put
   forward. Secondly, the joint default density function with the method of
   absolutely continuous change of measures is established. The numerical
   analysis results show that when the parties of the transaction of option
   are in the situation of looping correlated default, the price of
   vulnerable option is lower than that under one side default risk. This
   case implies that vulnerable option contains high credit risky exposure.
   In addition, the recovery rate sensitivity of the model is stronger than
   that of the existing model.

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