RT Journal Article
SR Electronic
T1 Valuation of European Options Subject to Financial Distress and Interest Rate risk
JF The Journal of Derivatives
FD Institutional Investor Journals
SP 44
OP 56
DO 10.3905/jod.1999.319118
VO 6
IS 3
A1 Peter Klein
A1 Michael Inglis
YR 1999
UL https://pm-research.com/content/6/3/44.abstract
AB Like the previous article, Klein and Inglis focus on credit risk. But in this case, it is the credit worthiness of the writer of a derivative instrument whose solvency is at issue. The risk of default on a vulnerable contract depends on the (correlated) changes in the value of the underlying for the derivative instrument, the value of the assets of the firm that writes the contract, and the risk-free interest rate. This article derives closed-form valuation equations for vulnerable European calls and puts and presents a number of numerical examples to illustrate the impact of the different model parameters on option value relative to Black-Scholes.