@article{Cho2025, 
author = {So-Yoon Cho and Geonwoo Kim},
title = {Analytical valuation of vulnerable options under a stochastic volatility model with a stochastic long-term mean},
year = {2025},
journal = {AIMS Mathematics},
volume = {10},
number = {9},
pages = {20219-20234},
keywords = {vulnerable option, stochastic volatility, characteristic function, stochastic long-term mean},
url = {https://www.sciopen.com/article/10.3934/math.2025903},
doi = {10.3934/math.2025903},
abstract = {We derive the explicit pricing formulas for vulnerable options under a stochastic volatility model with stochastic long-term mean. We extend the He and Chen model to incorporate counterparty default risk and derive explicit solutions for option prices using the characteristic function of the underlying asset's log-price. The option writer defaults when their asset value falls below a predetermined boundary, reducing the option payoff. Our numerical examples show that option prices are highly sensitive to default boundaries and exhibit asymmetric responses to volatility parameters.}
}