# credit options

SS 10- Reading 30-credit options- Binary and spread !!??? This material is way out of my head. Can anybody put it in simple words ? Thanks, Appreciate any help on this.

Binary - adverse credit event happens or doesn’t (as defined by the contract - example = default) Spread - pays off based on changes in the level of the credit spread relative to treasuries

Are we responsible for calculations?

Yes we are responsible

IMO, this stuff easier than most other topics in curriculum. May be u are simply scared, This is doable. Binary, you can remember this way, means 0s or 1s. Yes or No. Adverse event (yes or 1) => you get paid. No adverse event (No or 0) => you are not paid. Spread : widening spreads are bad. So you are paid whenever, the spreads widen (above strike rate ofcourse).

Credit call or put options calculations are in the curriculum? Are we supposed to know both of them?

Let me save you some time…if it’s in the curriculum, you are supposed to know it. If you see it calculated, or are asked to calculate, demonstrate, construct, show it, then you are supposed to know how to calculate it.

FRM2cfa Wrote: ------------------------------------------------------- > IMO, this stuff easier than most other topics in > curriculum. May be u are simply scared, This is > doable. > derswap07, I agree with FRM2cfa that this is totally doable. There are other more terrifying beast in the curriculum. I think sometimes CFA books just don’t use simple words in order to get on people’s nerve. This thread provides you with what you need to know in the exam simply.

this topic is easy, al the info will be give and you just have to calculate using that simple formula. will probably show up as a single MC question. Binary, just remember is based on the underyling asset’s PRICE Credit Spread, is based on the the underlying asset’s SPREAD, thus to a reference benchmark.

Thanks guys, I feel much better now. May be it was just panic attack.

mwvt9 Wrote: ------------------------------------------------------- > Binary - adverse credit event happens or doesn’t > (as defined by the contract - example = default) > > Spread - pays off based on changes in the level of > the credit spread relative to treasuries Spread, you stated based relative to treasuries, are you sure about that?. I thought it could be based on any reference benchmark, there are many default reference benchmarks out there.

whystudy Wrote: ------------------------------------------------------- > mwvt9 Wrote: > -------------------------------------------------- > ----- > > Binary - adverse credit event happens or > doesn’t > > (as defined by the contract - example = > default) > > > > Spread - pays off based on changes in the level > of > > the credit spread relative to treasuries > > > Spread, you stated based relative to treasuries, > are you sure about that?. I thought it could be > based on any reference benchmark, there are many > default reference benchmarks out there. For credit spread, it is relative to a risk-free benchmark or a default-free security which is usually a govt. note / treasury of the same maturity. Relative to treasuries sounds right to me.