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Valuing vulnerable Asian options with liquidity risk under Lévy processes

Published online by Cambridge University Press:  07 February 2022

Chengyou Cai  and
Xingchun Wang Open the ORCID record for Xingchun Wang [Opens in a new window]
Chengyou Cai
Affiliation:
School of International Trade and Economics, University of International Business and Economics, Beijing 100029, China. E-mails: xchwangnk@aliyun.com, wangx@uibe.edu.cn
Xingchun Wang
Affiliation:
School of International Trade and Economics, University of International Business and Economics, Beijing 100029, China. E-mails: xchwangnk@aliyun.com, wangx@uibe.edu.cn
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Abstract

In this paper, we study the pricing of vulnerable Asian options with liquidity risk. We employ general Lévy processes to capture the changes in the liquidity discount factors and the information processes of all assets. In the proposed pricing model, we obtain the closed-form pricing formula of vulnerable Asian options using the Fourier transform methods. Finally, the derived pricing formula is used to illustrate the effects of asymmetric jump risk, and the effects are relatively stable on (vulnerable) Asian options with different moneynesses.

Keywords

Asian optionsDefault riskLévy processesLiquidity discount factorLiquidity risk
Type
Research Article
Information
Probability in the Engineering and Informational Sciences , Volume 37 , Issue 3 , July 2023 , pp. 653 - 673
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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