| Abstract: |
| In this paper, we investigate vulnerable European options with risky collateral. We describe
the underlying asset and the risky collateral using geometric Brownian motions, and assume
the option issuer`s default intensity follows an Ornstein-Uhlenbeck process. An integral-form
pricing formula for call options is derived. Numerical results show that collateral can e ectively
cover credit losses, especially for in-the-money options with high default risk. |
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