VULNERABLE ASIAN OPTION PRICING MODELING BY PARTIAL DIFFERENTIAL EQUATION

Abstract. In this paper, we consider the default risk which is arisingfrom the probability that the instrument s issuer will default prior to theexpiration of the trade and will act against its contractual commitment.Our main focus will be on the options Highly exposed to the default riskof the instruments issuer which we hereinafter call them vulnerable op-tions. Hence, in this paper, we concentrate on the investigation of vulner-able options pricing. Particularly, we scrutinize vulnerable Asian options.Under the risk-neutral condition, the vulnerable geometric Asian option sprice can be expressed by parabolic partial di erential equations with time-dependent coe cients. It s possible to obtain a closed form solution forpricing the vulnerable geometric Asian option.

کلیدواژه ها:

Vulnerable options ، Boundary value problem ، Asian option