Abstract:In this paper, we study the pricing of vulnerable European options under inflation. Firstly, we use the basket price equation to discount the stock price and the asset value of the option seller, and derive more market practical dynamics equations. Secondly, we adopt the Esscher Transform for the diffusion parts of the equations to determine an equivalent martingale measure. Finally, a closed-form solution for prospective vulnerable European options is obtained by using Laplace Transform.