Valuation of exchange option with credit risk in a hybrid model

In this paper, the valuation of the exchange option with credit risk under a hybrid credit risk model is investigated. In order to build the hybrid model, we consider both the reduced-form model and the structural model. We adopt the probabilistic approach to derive the closed-form formula of an exchange option price with credit risk under the proposed model. Specifically, the change of measure technique is used repeatedly, and the pricing formula is provided as the standard normal cumulative distribution functions.