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| Keywords | |
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Girsanov's theorem |
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martingale representation |
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credit risk |
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equivalent martingale measure |
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forward martingale measure. |
| Authors | |
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DING Deng |
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CHAN Kaleong |
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The Martingale Approach for Credit-Risky Option Pricing
DING Deng, CHAN Kaleong
Department of Mathematics, University of Macau
The financial model for derivatives with counterparty risk is considered. The firm value model is applied to price European type options for derivatives with counterparty default risk. The martingale approach is used to derive an explicit pricing formula for such Black-Scholes option under the Gaussian assumptions, which generalize the results in [1] (Ammann, 2001).