This paper presents both closed-form formulas and binomial tree algorithms to evaluate vulnerable derivatives. The payoff function extends mainly from the Klein (1996) and the Ammann (2001) credit risk frameworks. Three stochastic processes, the underlying stock price, the assets value of the...

This paper proposes a simple algorithm extending the discrete CRR (1979) model to evaluate vulnerable derivatives, which include two stochastic processes, the underlying stock price and the assets value of the option writer. Introducing the concept of expected intrinsic value, univariate...