Pricing counterparty default risks: Applications to FRNs and vulnerable options |
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Authors: | Jangkoo Kang |
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Institution: | a Graduate School of Management at KAIST, Seoul, Korea b Korea Securities Research Institute, Seoul, Korea |
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Abstract: | 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. |
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Keywords: | Counterparty risk Credit risk Floating-rate note Vulnerable option |
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