Pricing counterparty default risks: Applications to FRNs and vulnerable options [An article from: International Review of Financial Analysis]

This digital document is a journal article from International Review of Financial Analysis, published by Elsevier in 2005. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
This paper provides simple closed-form pricing models for floating-rate notes and vulnerable options under the counterparty risk framework of [Jarrow, R., Yu, F., 2001. Counterparty risk and the pricing of default risk. Journal of Finance 56, 1765-1799]. After deriving closed-form pricing models for them, this paper illustrates the impact of the default intensity of counterparty on the prices of floating-rate notes and vulnerable options. Numerical examples show that the default risk of counterparty is an important factor of the value of floating-rate notes and vulnerable options.