Option Pricing for Path-Dependent Options with Assets Exposed to Multiple Defaults Risk

Abstract EN

In the present paper, we derive analytical formulas for barrier and lookback options with underlying assets exposed to multiple defaults risks which include exogenous counterparty default risk and endogenous default risk.

The endogenous default risk leads the asset price drop to zero and the exogenous counterparty default risk induces a drop in the asset price, but the asset can still be traded after this default time.

An original technique is developed to valuate the barrier and lookback options by first conditioning on the predefault and the afterdefault time and then obtaining the unconditional analytic formulas for their price.

We also compare the pricing results of our model with the default-free option model and exogenous counterparty default risk option model.