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Review of Derivatives Research
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17-10-2022

Pricing vulnerable basket spread options with liquidity risk

Authors: Ziming Dong, Dan Tang, Xingchun Wang

Published in: Review of Derivatives Research | Issue 1/2023

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Abstract

The article explores the pricing of vulnerable basket spread options, which allow investors to profit from the price difference between two baskets of assets. These options are traded in over-the-counter markets, exposing them to default risk and liquidity risk. The authors extend existing models to account for stochastic liquidity risk and default risk, developing closed-form approximations for pricing. The study highlights the significant impact of liquidity risk on option prices and provides a framework that can be applied to various types of options. The article includes numerical experiments to validate the accuracy of the approximations and illustrates the effects of liquidity and default risk on option prices.
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Metadata
Title
Pricing vulnerable basket spread options with liquidity risk
Authors
Ziming Dong
Dan Tang
Xingchun Wang
Publication date
17-10-2022
Publisher
Springer US
Published in
Review of Derivatives Research / Issue 1/2023
Print ISSN: 1380-6645
Electronic ISSN: 1573-7144
DOI
https://doi.org/10.1007/s11147-022-09192-0

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