The valuation of many types of financial contracts and contingent claim agreements is complicated by the possibility that one party will default on their contractual obligations. This dissertation develops a general model that prices Black-Scholes options subject to intertemporal default risk using stochastic barrier option pricing theory. The explicit closed-form solution is obtained by generalizing the reflection principle to k-space to determine the appropriate transition density function. The European analytical valuation formula has a straightforward economic interpretation and preserves much of the intuitive appeal of the traditional Black-Scholes model. The hedging properties of this model are compared and contrasted with the default-free model. The model is extended to include partial recoveries. In one situation, the option holder is assumed to recover α (a constant) percent of the value of the writer’s assets at the time of default. This version of the partial recovery option leads to an analytical valuation formula for a first passage option - an option with a random payoff at a random time. / Ph. D.
Identifer | oai:union.ndltd.org:VTETD/oai:vtechworks.lib.vt.edu:10919/38470 |
Date | 06 June 2008 |
Creators | Rich, Don R. |
Contributors | Finance, Chance, Don M., Morgan, George E., Zia, Royce K. P., Reynolds, Marion R. Jr., Denis, David J., Kadlec, Gregory B. |
Publisher | Virginia Tech |
Source Sets | Virginia Tech Theses and Dissertation |
Language | English |
Detected Language | English |
Type | Dissertation, Text |
Format | xiii, 209 leaves, BTD, application/pdf, application/pdf |
Rights | In Copyright, http://rightsstatements.org/vocab/InC/1.0/ |
Relation | OCLC# 30859605, LD5655.V856_1993.R574.pdf |
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