Pusan National University 'Talks Money' with Novel Approach for Pricing Risky Options

BUSAN, South Korea, Sept. 21, 2021 /PRNewswire/ -- In light of the global financial crisis of 2007-2008, several mathematics researchers have been at work to propose a financial model that would better explain the real-life volatile financial market and, specifically, predict the pricing for options with default risk. A group of researchers, led by Dr. Ji-Hun Yoon from Pusan National University, have successfully arrived at a Mellin transform approach to address this mathematical problem, according to a pioneering study published in Computational Economics.

In 2008, when the world economy was reeling from the effects of the global economic crisis, several mathematicians realized the limitations of existing financial models in accounting for the volatilities in the financial market. Even predicting the pricing of option contracts accurately became crucial to the associated financial stakeholders. These series of events subsequently prompted groups of mathematicians from different countries and institutions to gather and apply their prowess to create a better mathematical model for the pricing of vulnerable options.

Such is the story of a study published in Computational Economics, made available online on 19^th July 2021, that proposes a novel Mellin transform approach for pricing option contracts with default risk. The study was led by Dr. Ji-Hun Yoon, who is an Associate Professor at the Department of Mathematics, in Pusan National University, Republic of Korea. Speaking about the real-life applications of this study, Dr. Yoon explains, "Financial derivatives such as currency options, options on precious metals, or credit default swaps, have been traded in the over-the-counter market, where there aren't any exchange or clearing corporations. Therefore, buyers are vulnerable to the default risk. We obtained an explicit closed-form solution for derivatives, which directly leads to the estimation of the option prices or volatilities with higher accuracy and effectiveness. As these advantages result in shorter computational times, our approach can be applied to the pricing of diverse financial derivatives."

This study addresses the need for pricing the model dynamics of the financial derivatives in a manner that reflects the current trends in the financial market. The researchers unanimously agree that this allows the stakeholders to construct not only diverse financial derivatives, but also insurance product economically. In addition, finding the explicit closed-form solution for the derivatives will allow stakeholders to estimate the option values or the price of the insurance instruments more easily and effectively.

These findings come at an opportune moment in the modern era when more and more people are signing up for insurance securities, which are predicated on the trends in the financial market. Dr. Sun-Yong Choi, one of the co-authors of the study, adds, "To deal with these kinds of insurance products, we have to find the accurate solutions that benefit everyone who invests in them. In this regard, we believe that our research's results will have significant impact on people's lives, in the near future."

The world can hope that this study significantly impacts the financial decisions of all stakeholders, particularly in options pricing.

Reference

Title of original paper: A Mellin Transform Approach to the Pricing of Options with Default Risk
Journal: Computational Economics
DOI: https://doi.org/10.1007/s10614-021-10121-w
Corresponding author's email: [email protected] 

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