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Discrete Dynamics in Nature and Society
Volume 2018 (2018), Article ID 8545841, 15 pages
Research Article

Pricing Vulnerable Options with Market Prices of Common Jump Risks under Regime-Switching Models

1School of Mathematics, China University of Mining and Technology, Xuzhou, China
2School of Management Science and Engineering, Nanjing University of Finance and Economics, Nanjing, China
3School of Finance and Center for Financial Engineering, Nanjing Audit University, Nanjing, China

Correspondence should be addressed to Miao Han; moc.621@oaimnahkcul

Received 2 September 2017; Accepted 14 December 2017; Published 21 January 2018

Academic Editor: Paolo Renna

Copyright © 2018 Miao Han et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


This paper investigates the valuation of vulnerable European options considering the market prices of common systematic jump risks under regime-switching jump-diffusion models. The way of regime-switching Esscher transform is adopted to identify an equivalent martingale measure for pricing vulnerable European options. Explicit analytical pricing formulae for vulnerable European options are derived by risk-neutral pricing theory. For comparison, the other two cases are also considered separately. The first case considers all jump risks as unsystematic risks while the second one assumes all jumps risks to be systematic risks. Numerical examples for the valuation of vulnerable European options are provided to illustrate our results and indicate the influence of the market prices of jump risks on the valuation of vulnerable European options.