Abstract:

The problem of vulnerable European option pricing was discussed based on the corporate value models of the credit risk. A model of vulnerable option pricing was developed when the stock price equation was driven by a geometric fractional Brownian motion.  Then, with the method of qusi-martingale pricing, the pricing formula for vulnerable European call options was deduced under the hypothesis of fractional HJM interest rate and stochastic debt.

Key words: vulnerable European option pricing; fractional HJM interest rate model; qusi-martingale pricing