Binary Credit Options

CFA Level III
#1

Wait it is binary credit options or futures? Options right and these are the ones in which a credit event needs to happen and a price decline?

#2

not really sure what are you asking, but what you are describing is probably a binary put option

#3

For those to be in the money does a credit event needs to happen and a price decline?

#4

binary credit option binary - is like a barrier, if event happens - payoff occurs, if event doesnt happen - payoff doesnt occur when you aim at price decline - it is binary put option. Price decline can happen from events such as downgrades and bakruptcy when you aim at price increase it is call option. upgrade would be one of those events

#5

So for the binary put option you need a price decline and credit event, price decline alone will not be in the money?

#6

99% sure

#7

Yes you need an event 99.9% sure

#8

well I feel about 95% sure so I think we are good.

#9

You definitely need a credit event for a binary credit option to kick in.

#10

^^^and a price decline, that is key here…obviously if a credit event happens you imagine a price decline would happen

#11

agreed

#12

s23dino Wrote: ------------------------------------------------------- > ^^^and a price decline, that is key > here…obviously if a credit event happens you > imagine a price decline would happen You have credit protection by buying binary credit option (or called binary credit put option) (based on underlying asset’s price vs strike price) or credit spread option (based on underlying assets’ yield spread vs strike yield spread). For credit protection (i.e. positive payoff) to kick in, two sufficient and necessary conditions must happen : 1) adverse credit event or events; 2) price decline below strike price.

#13

comp_sci_kid Wrote: ------------------------------------------------------- > binary credit option > > binary - is like a barrier, if event happens - > payoff occurs, if event doesnt happen - payoff > doesnt occur > > when you aim at price decline - it is binary put > option. Price decline can happen from events such > as downgrades and bakruptcy > > when you aim at price increase it is call option. > upgrade would be one of those events no correction, if event happends payoff only occur if option is in the money (i.e below strike price). same for credit spread call option, payoff only if spread widening due to credit event > strike spread.

#14

pmoonoi Wrote: ------------------------------------------------------- > s23dino Wrote: > -------------------------------------------------- > ----- > > ^^^and a price decline, that is key > > here…obviously if a credit event happens you > > imagine a price decline would happen > > > You have credit protection by buying binary credit > option (or called binary credit put option) (based > on underlying asset’s price vs strike price) or > credit spread option (based on underlying assets’ > yield spread vs strike yield spread). For credit > protection (i.e. positive payoff) to kick in, two > sufficient and necessary conditions must happen > : > 1) adverse credit event or events; > 2) price decline below strike price. For a credit spread option you only need the spread to widen above the strike not a credit event for the option to be in the money.