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AMERICAN OPTIONS AND COUNTERPARTY RISK
(English)Manuscript (preprint) (Other academic)
Abstract [en]

We study a problem of pricing a contract consisting of two American options between two defaultable counterparties. We embed the default risk directly in the expected pay-off so that optimal exercise strategies automatically compensate for the default risk. The problem reduces to a zero-sum optimal stopping game and we state and prove a verication theorem. Moreover, we solve explicitly an example where Player 1 sells a perpetual American call to Player 2 and Player 2 sells a perpetual American put to Player 1; and where one of the players has exponentially distributed default time.

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URN: urn:nbn:se:uu:diva-287361OAI: oai:DiVA.org:uu-287361DiVA: diva2:922639
Available from: 2016-04-24 Created: 2016-04-24 Last updated: 2016-04-24

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