- When the heck does this thing pay out? Is it solely based on price? 1.a. Couldn’t something move the price that wasn’t a credit event (example - large block sold in secondary market)? 2. Are they American/Euro or both?
mwvt9 Wrote: ------------------------------------------------------- > 1. When the heck does this thing pay out? Is it > solely based on price? No it is based on the occurence of the credit event > > 1.a. Couldn’t something move the price that wasn’t > a credit event (example - large block sold in > secondary market)? No I think it is more like a negative event (read default) > 2. Are they American/Euro or both? Good Question :)) (I don’t know)
To your Q2. I think it has to be American as the payoff takes place when the credit event occurs and so doesn’t have to wait till expiration of the option. But again this is not explicitly mentioned in the books.
I actually think they are european. you don’t care about temporary downgrades that create price changes, but you care that at the end of your horizon the value of your bonds are not affected by credit risk. For Q1 - that is what I know that they are based on value(price) - however that does not mean that all change in price is included in payoff but just the portion attributable to change in credit rating. Now I am not sure how they determine that change but it might be outside the scope of the exam
mwvt9 Wrote: ------------------------------------------------------- > 1. When the heck does this thing pay out? Is it > solely based on price? Based on default and can be made to pay on credit downgrade. > 1.a. Couldn’t something move the price that wasn’t > a credit event (example - large block sold in > secondary market)? No and if this is an issue, it is not addressed in the curriculum. > > 2. Are they American/Euro or both? Since they can only be exercised based on an event and not time, I think the answer is neither. Someone care to chime in if I am on the mark here?