Valuing Seller-Defaultable Options
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 t...
Saved in:
Published in | The journal of futures markets Vol. 33; no. 2; pp. 129 - 157 |
---|---|
Main Authors | , , , |
Format | Journal Article |
Language | English |
Published |
Hoboken
Blackwell Publishing Ltd
01.02.2013
Wiley Periodicals Inc |
Subjects | |
Online Access | Get full text |
Cover
Loading…
Summary: | 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 |
---|---|
Bibliography: | ArticleID:FUT21542 istex:7DA8C7DFAC4A80E3200C25EDD16C0B4216D5A483 ark:/67375/WNG-F31GDK4T-V The authors would like to thank anonymous referees and the editor for their helpful comments. The authors alone remain responsible for any errors in connection with this work. ObjectType-Article-2 SourceType-Scholarly Journals-1 ObjectType-Feature-1 content type line 23 |
ISSN: | 0270-7314 1096-9934 |
DOI: | 10.1002/fut.21542 |