Research On Option Pricing With Credit Risk And Stochastic Default Barriers Under Regime-Switching

Since the financial crisis in 2007,the financial trading market has paid increasing attention to the counterparty credit risk,especially the financial derivatives in the over-the-counter market without exchange participation.Therefore,the risk of counterparty default should be considered in the pricing of OTC financial derivatives.In this paper,we first propose an improved fragile option pricing model.Specifically,it is assumed that the model parameters include interest rates,jump intensity,and volatility of asset values,which are regulated by an observable continuous time finite state Markov chain.Suppose the European fragile option is exposed not only to the risk of default,but also to a rare shock to the underlying asset and counterparty assets.Risky assets are driven by a related jump-diffusion process.Moreover,barriers to default are driven by geometric Brownian motion associated with risky assets.Under the framework of the proposed model,the explicit solution of the European fragile option pricing formula is obtained.In addition,we use numerical simulation method to discuss the influence of default barriers on option price,and find that the randomization of default barriers will increase the credit risk,which will lead to the reduction of option price.Secondly,we propose a pricing model of fragile power exchange options with random default barriers under market rotation model.Specifically,suppose two underlying assets by the relevant and geometric Brownian motion,driven by the rotation deploying regulation,options writers asset value by the rotation adjustment of mean reversion model driven,deploying a counterparty default barriers for random,namely,driven by a geometric Brownian motion,and with two associated the assets of the underlying asset and options writers.By means of equivalent martingale measure transformation,the pricing formula of fragile power exchange options with random default barriers is derived.In addition,numerical simulation is used to analyze the influence of relevant parameters on the price of power exchange options.