Potential Credit Risk to buyer of option

CFA Level III
#1

Long Call American Option Mkt price $27 exercise price is 25 cost of the option was $2.86

What is the potential credit risk to us?

IMO it should be the difference between the mkt and exer. price ($2) but according to the schweser book it list the cost of the option $2.86? Why is this?

As a seller of an option we’ll never be exposed to credit risk since we’re collecting our premium if memory serves me right?

#2

Any thoughts?

#3

Pot CR for Long Option should = Mkt price of option.

#4

If out of money if in the money it would be the strike price no?

#5

Yeah, credit risk of an option is always unilateral to the long. Credit risk only exists if value is positive to the long.

#6

assuming its OTC the higher of exercise gain(2.00) & mkt price (2.86)

ETD zero (central counterparty)

#7

potential credit risk is based on market value not intrinsic value

#8

I think you’re right (I may also be wrong). The premium is paid up front and is sunk. You can exercise immediately for gain of 2 dollars = credit risk to you.