This paper analyzes the effect of counterparty credit risk on optimal early exercise policy and value of American options. In contrast with the existing literature we find that the price of the underlying asset at which it is optimal to exercise an American option can be significantly different...

Purpose – The purpose of this paper is to extend the models of Johnson and Stulz, Klein and Klein and lnglis to analyse the properties of vulnerable American options. Design/methodology/approach – The presented model allows default prior to the maturity of the option based on a barrier which...