Pricing fuzzy vulnerable options and risk management

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

The assumption of unrealistic "identical rationality" in classic option pricing theory is released in this article to amend Klein's [Klein, P. (1996). Pricing Black-Scholes options with correlated credit risk. Journal of Banking Finance, 1211-1129] vulnerable option pricing formula. Through this formula, default risk and liquidity risk are both well-explained when the investment behaviors and market expectations of the participants are heterogeneous. The numerical results show that when the investing decisions of each market participant come from their individual rationality and use their own subjective price to trade, the option price becomes a boundary. The upper boundary becomes an absolutely safe line and the lower boundary becomes an absolutely unsafe line for investors who want to invest in some financial securities with default risk. The proposed model suggests a more realistic pricing mechanism for the issuers and traders who want to value options with default risk.

Original languageEnglish
Pages (from-to)12188-12199
Number of pages12
JournalExpert Systems With Applications
Volume36
Issue number10
DOIs
Publication statusPublished - 2009 Dec 1

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Risk management
Costs
Finance

All Science Journal Classification (ASJC) codes

  • Engineering(all)
  • Computer Science Applications
  • Artificial Intelligence

Cite this

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Pricing fuzzy vulnerable options and risk management. / Liu, Yu-Hong.

In: Expert Systems With Applications, Vol. 36, No. 10, 01.12.2009, p. 12188-12199.

Research output: Contribution to journalArticle

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