CVA and vulnerable options in stochastic volatility models

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• dc.contributor.author Alòs, Elisa
• dc.contributor.author Antonelli, Fabio
• dc.contributor.author Ramponi, Alessandro
• dc.contributor.author Scarlatti, Sergio
• dc.date.accessioned 2024-02-19T07:24:53Z
• dc.date.available 2024-02-19T07:24:53Z
• dc.date.issued 2021
• dc.description.abstract This work aims to provide an efficient method to evaluate the Credit Value Adjustment (CVA) for a vulnerable European option, which is an option subject to some default event concerning the issuer solvability. Financial options traded in OTC markets are of this type. In particular, we compute the CVA in some popular stochastic volatility models such as SABR, Hull et al., which have proven to fit quite well market derivatives prices, admitting correlation with the default event. This choice covers the relevant case of Wrong Way Risk (WWR) when a credit deterioration determines an increase in the claim value. Contrary to the structural modeling adopted in [G. Wang, X. Wang & K. Zhu (2017) Pricing vulnerable options with stochastic volatility, Physica A 485, 91–103; C. Ma, S. Yue & Y. Ma (2020) Pricing vulnerable options with Stochastic volatility and Stochastic interest rate, Computational Economics 56, 391–429], we use the reduced-form intensity-based approach to provide an explicit representation formula for the vulnerable option price and related CVA. Later, we specialize the evaluation formula and construct its approximation for the three models mentioned above. Assuming a CIR model for the default intensity process, we run a numerical study to test our approximation, comparing it with Monte Carlo simulations. The results show that for moderate values of the correlation and maturities not exceeding one year, the approximation is very satisfactory as of accuracy and computational time.
• dc.format.mimetype application/pdf
• dc.identifier.citation Alos E, Antonello F, Ramponi A, Scarlatti S. CVA and vulnerable options in stochastic volatility models. International Journal of Theoretical and Applied Finance. 2021;24(2):35 p. DOI: 10.1142/S0219024921500102
• dc.identifier.doi http://dx.doi.org/10.1142/S0219024921500102
• dc.identifier.issn 0219-0249
• dc.identifier.uri http://hdl.handle.net/10230/59133
• dc.language.iso eng
• dc.publisher World Scientific Publishing
• dc.relation.ispartof International Journal of Theoretical and Applied Finance. 2021;24(2):35 p
• dc.rights Electronic version of an article published as International Journal of Theoretical and Applied Finance. 2021;24(2):35 p. 10.1142/S0219024921500102 © World Scientific Publishing Company https://doi.org/10.1142/S0219024921500102
• dc.rights.accessRights info:eu-repo/semantics/openAccess
• dc.subject.keyword Credit value adjustment
• dc.subject.keyword vulnerable options
• dc.subject.keyword Stochastic volatility model
• dc.subject.keyword intensity approach
• dc.title CVA and vulnerable options in stochastic volatility models
• dc.type info:eu-repo/semantics/article
• dc.type.version info:eu-repo/semantics/acceptedVersion