Question 18.5 “Reneau describes a credit options strategy that pays the holder a fixed sum, which is agreed upon when the options is written, and occurs in the event that an issue or issuer goes into default.”… So this dude is talking about a binary credit option In the next paragraph… “Reneau mentions that credit options written on an underlying asset will protect against declines in asset valuation.” They are asking if Reneau is correct in the second statement about the binary credit options. Shouldn’t this be qualified with IF a specific event occurs or was I supposed to link his earlier statement to his second one?
I got this question wrong as well. The deal here is that all of this is true and the question is written in such a manner that it appears that he could be talking about another type of credit option. Since default is clearly a decline in asset value, he is correct and no “IF” is needed since the binary option protects in the event of default which of course kills the asset value. I think the question is misleading because IF would certainly flow better in the case of a binary option.
You know, the other thing that is annoying here is that they say credit option “written.” Writing an option implies you are the seller. I’m guessing they meant an option written on an underlying asset which you then bought. Poorly “written” question, no?