PPT Slide
Option on a credit risky bond
European put option with maturity one year on a two-year XYZ
zero-coupon bond. At option’s maturity, option holder can sell the
XYZ zero-coupon bond for the strike price of 92.
Let the face value of XYZ zero-coupon bond be 100.
= P(0) = (1- lm0) [p0 P(1)u, n + (1 - p0)P(1)d, n]/r(0)
+ lm0 [p0 P(1)u, b + (1 - p0)P(1)d, b]/r(0)