In a default corridor [0; B] that the stock price can never enter, a deep out-of-the-money American put option replicates a pure credit contract (Carr and Wu, 2011). Assuming discrete (one-period-ahead predictable) cash áows, we show that an endogenous credit-risk model generates, along with the...

In a default corridor [0; B] that the stock price can never enter, a deep out-of-the-money American put option replicates a pure credit contract (Carr and Wu, 2011). Assuming discrete (one-period-ahead predictable) cash áows, we show that an endogenous credit-risk model generates, along with the...

In a standard option-pricing model, with continuous-trading and diffusion processes, this paper shows that the price of one European-style option can be factorized into two intuitive components: One robust, X0, which is priced by arbitrage, and a second, [Pi]0, which depends on a risk orthogonal...

Consider a non-spanned security C_{T} in an incomplete market. We study the risk/return trade-offs generated if this security is sold for an arbitrage-free price Câ‚€ and then hedged. We consider recursive "one-period optimal" self-financing hedging strategies, a simple but tractable...