Pricing Vulnerable Options Under a Markov-Modulated Regime Switching Model |
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| Authors: | Wei Wang Wensheng Wang |
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| Institution: | 1. School of Finance and Statistics , East China Normal University , Shanghai, China wswang2008@163.com;3. School of Finance and Statistics , East China Normal University , Shanghai, China;4. Department of Mathematics , Hangzhou Normal University , Hangzhou, China |
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| Abstract: | In this article, we consider the pricing of vulnerable European options when the dynamic of the risky assets are governed by Markov-modulated Geometric Brownian Motions. The regime switching Esscher transform is employed to determine an equivalent martingale measure. In particular, we also provide analytical pricing formulas of vulnerable European options under a Markov-modulated jump-diffusion model. |
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| Keywords: | Esscher transform Option pricing Regime switching Vulnerable option |
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