Journal of applied mathematics & informatics

The Korean Society for Computational and Applied Mathematics (한국전산응용수학회)
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THE PRICING OF VULNERABLE POWER OPTIONS WITH DOUBLE MELLIN TRANSFORMS

  • HA, MIJIN (Department of Mathematics, Pusan National University) ;
  • LI, QI (Department of Mathematics, Pusan National University) ;
  • KIM, DONGHYUN (Department of Mathematics, Pusan National University) ;
  • YOON, JI-HUN (Department of Mathematics, Pusan National University)
  • Received : 2021.02.10
  • Accepted : 2021.06.10
  • Published : 2021.09.30
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Abstract

In the modern financial market, the scale of financial instrument transactions in the over-the-counter (OTC) market are increasing. However, in this market, there exists a counterparty credit risk. Herein, we obtain a closed-form solution of power option with credit risks, using the double Mellin transforms. We also use a numerical method to compare the differentiations of option price between the closed-form solution and Monte-Carlo simulation. The result shows that the closed-form solution is precise. In addition, the option's price is sensitive to the exponent of the maturity stock price.

Keywords

Acknowledgement

This work was supported by BK21 FOUR Program by Pusan National University Research Grant, 2020 and the research by J.-H. Yoon was supported by National Research Foundation of Korea grants funded by the Korean government(NRF-2019R1A2C108931011).

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