This thesis follows the idea of Klein and Yang (2013) to study the effect of counterparty credit risk and valuation of Vulnerable American options. Most existing literatures use the structural model (Merton 1974) to study the vulnerable options. However, structural model uses the unrealistic assumptions for the corporate asset. In addition, calibration stochastic asset processes using public information in the structural model is some more difficult than anticipated (Wang 2009). This thesis uses the reduced-form (intensity) model to study the credit risk of vulnerable American put options and compare the results with Klein and Yang (2013). We conclude that counterparty credit risk will affect the vulnerable option value as Klein and Yang did in their paper. Throughout, we rely on binominal tree method to derive our numerical results
