Credit option strategy that takes form of call or put?

Hi, The following is a statement from a vignette: A credit option strategy that pays the holder a fixed sum, which is agreed upon when the option is written, and occurs in the event that an issue or issuer goes into default. This strategy can take the form of either puts or calls. Is this statement talking about Credit default Swaps? If so, there are no calls or puts in CDS. Thanks, MG.

Doesn’t have to be CDS. It can be put on a bond, if bond get downgraded or default. For call, sure, same concept, somebody get a lump sum once a bond is upgraded (can’t think of anything in real world).

ws, it is called Credit Option

^I know that…thanks

It is an error from schweser - The derivative is a binary credit put option which pays off when there is a credit event i.e. default or downgrade. However the payoff on these instruments is Max(0, K- S(T)) where S(T) is the recovery rate on the bond which has experienced a credit event.

Malhar…I think I know what question you are referring to. I think I recently saw it in a Schweser practice test. If I am thinking of the same one then it is not about CDS but rather about credit options. I think you are right that you cannot do a put or call on CDS, but rather you buy protection or sell protection…I don’t know why they don’t have more about CDS in the curriculum but they don’t. CDS are a huge part of current finance. I think in a year or so there will be a lot more about CDS in the CFA curriculum but for this year’s exam we need to know about the less well known and used (IMO) credit options and credit spreads unfortunately.

thanks folks.