All of these credit derivatives are positive to the long when spreads widen, correct?
Credit Spread Call Option - payoff would be: [0, (spread @ maturity - Strike spread)] * Notional * Risk factor - inital cost. (Obviously a credit spread put would be opposite of this - meaning payoff is positive to the long if spreads NARROW, but for drawing similarities let’s ignore that for now.)
Credit spread Fwd - payoff: (spread @ maturity - contract spread) * Notional * Risk Factor
Binary Credit Put Option - payoff: (Strike - Mkt Value of bond) - initial cost
Now, the binary credit option technically doesn’t deal with spreads, only Market value due to negative credit events. However, my thought on this is that if a negative credit event happens the spread on the issue will likely increase (e.g. widen) which will cause the mkt value to decrease and create a positive option value for the long put.
Are there any credit derivative calcs that I am forgetting here? I didn’t include the CDS information since I don’t believe there are any formulas for them, they are only conceptual in the books, correct? Thoughts?