The martingale approach for vulnerable binary option pricing under stochastic interest rate

摘要

We consider the vulnerable option pricing problem when the stochastic interest rate is driven by a Hull-White model. Based on the firm value model, we suppose that the stock prices, assets and liabilities of a company follow the relevant O-U processes. We adopt the martingale approach to determine the equivalent martingale measure for pricing the vulnerable binary option, the analytical pricing formula of the vulnerable binary options is derived.