Pricing and hedging strategy for options with default and liquidity risk

I. Ming Jiang, Yu-Hong Liu, Zhi Yuan Feng, Meng-Kuan Lai

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

This study applies fuzzy set theory to the vulnerable Black-Scholes (1973) or Merton (1973) formula. Expectations of heterogeneity mean option prices are expected to be imprecise, thus making it natural to consider fuzziness to handle this. This article presents a fuzzy approach to value Black-Scholes options subject to non-identical rationality and correlated credit risk. Although no analytical solution is available, this study employs a fuzzy approach to derive an approximate analytical expression for the upper and lower bounds of the European fuzzy vulnerable option price. Furthermore, the Greeks and hedging strategy of the proposed model are also provided in this article.

Original languageEnglish
Pages (from-to)127-144
Number of pages18
JournalAsia Pacific Management Review
Volume17
Issue number2
Publication statusPublished - 2012 Jun 1

Fingerprint

Hedging strategies
Liquidity risk
Default risk
Pricing strategy
Option prices
Black-Scholes
Rationality
Lower bounds
Credit risk
Fuzzy set theory
Analytical solution
Upper bound

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Strategy and Management

Cite this

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Pricing and hedging strategy for options with default and liquidity risk. / Jiang, I. Ming; Liu, Yu-Hong; Feng, Zhi Yuan; Lai, Meng-Kuan.

In: Asia Pacific Management Review, Vol. 17, No. 2, 01.06.2012, p. 127-144.

Research output: Contribution to journalArticle

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