The pricing of dynamic fund protection with default risk

In over-the-counter markets, many options on a defaultable instrument are subject to default risks stemming from the possibility that the option writer may not carry out its contractual obligations. In this study, we examine the valuation of dynamic fund protection with an issuer's credit risk. By using double Mellin transforms and the method of images, we obtain the closed-form solution of vulnerable dynamic fund protection. Moreover, we analyze the value of dynamic fund protection under the default risk of firms with respect to the model parameters and demonstrate that our closed-form solution has been derived accurately and efficiently by comparing it with the solution from the Monte-Carlo simulation.