A Pricing Model Of The Over-The-Counter Options And Its Fitted Finite Volume Method Solution

Along with the economic globalization,the major economies have become more and more closely related, and the conductivity of risk is becoming much stronger. In order to reduce or avoid risk, all kinds of financial derivatives thrive in the international financial market, especially the options which are widely traded to hedge risk. Among these financial derivatives, only a small number are traded on exchanges, most derivatives are traded in the OTC (over-the-counter) market. The over-the-counter (OTC) options refer to the options which are traded in the over-the-counter market. Differ from the exchange traded options, the OTC options are not only exposed to the systematic risk, but to the credit risk as well. The credit risk grows along with the default probability. As the option transaction are usually not standard, there is no guarantee of the execution. If the option seller broke, the default would happen. Therefore, the credit risk becomes an important factor of the option value, and the influence must be precisely measured.So we introduced the credit risk while valuing the European Options. When constructing the pricing model, we tried to quantify the credit risk, and using the hedging technique to set up the pricing PDE model. As the solving area is asymmetric, we used the numerical method to solve the equation. Finally we chose the fitted finite volume method to solve the pricing model, then present the numerical method and the numerical solution.The main purpose of this paper is to enrich the researches of financial derivatives’pricing, and to find a more accurate way to value the OTC European options. It also helps guiding the options trading activity, reducing the potential risk the holder faced. At the same time, this paper provided a technique for other over-the-counter financial derivatives researches, theoretically promoted the development of the over-the-counter market.