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Valuing Seller-Defaultable Options

✍ Scribed by JIN-RAY LU; YI-CHUN CHEN; CHIH-CHIANG HWANG; YI-CHUN TING

Book ID
102842705
Publisher
John Wiley and Sons
Year
2012
Tongue
English
Weight
880 KB
Volume
33
Category
Article
ISSN
0270-7314

No coin nor oath required. For personal study only.

✦ Synopsis

This study analyzes seller‐defaultable options that allow option writers to have a free‐will right to default, along with some prespecified default mechanisms. We analytically and numerically examine the pricing, hedging, defaulting, and profitability of the seller‐defaultable options, considering three possible scenarios for seller default. Analyzing the essential implications of seller‐defaultable options, we show that the option price is positively correlated with the default fine, underlying asset price, and volatility. The seller‐defaultable option's Greeks appear more complicated than those of the plain vanilla options. The likelihood of sellers defaulting increases with the underlying asset price, interest rate, volatility, and maturity time. Subject to the default mechanism, the buyers’ trading involves a trade‐off between profits and costs. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 33:129–157, 2013

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