Valuing vulnerable options with two underlying assets

ABSTRACT

In this paper, we consider vulnerable options with two underlying assets, including options on the maximum of two underlying prices, options paying the best and cash, and options on the maximum of two geometric average prices. We derive the explicit pricing formulae of these options and perform numerical examples to illustrate prices of these options.

KEYWORDS:

• Vulnerable Options
• options on the Maximum
• options Paying the Best and Cash
• counterparty Default Risk

JEL CLASSIFICATION:

• G13
• G12

Acknowledgments

The authors would like to thank the anonymous referees and the editor, David Peel, for their helpful comments and valuable suggestions that led to several important improvements. All errors are our responsibility.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ The authors thank the referees for pointing out this issue.

Additional information

Funding

This study was supported by the National Natural Science Foundation of China (Nos. 11701084 and 11671084) and Excellent Young Scholars Program in University of International Business and Economics (17YQ01).