# Credit Spread Forward : Long or short

R30 : CFAI text V4 Q4 on P.148 The statement : She decides to enter into a six-month Credit Spread Forward contract “taking the position that the Credit Spread will decrease”. Is this a long or short position by “taking the position that the Credit Spread will decrease”. Please judge before you refer to the solution on P.158. How do you judge ?

I assume she is short, since she is betting against worsening credit conditions

rosengri Wrote: ------------------------------------------------------- > I assume she is short, since she is betting > against worsening credit conditions Credit Spread decrease means improving credit condition rather than worsening credit condition.

yes, that was my thought - bet against worsening, i.e. bet for improving

rosengri Wrote: ------------------------------------------------------- > yes, that was my thought - bet against worsening, > i.e. bet for improving You are right. This is from the perspective of short (bet against worsening or bet for improving). I made a mistake when I look at the question the first time.

hey guys, can anyone refresh our memories with the formula for the payoff, please? I remember that it is something involving the notional, some kind of risk factor and the difference between the strike spread and the spread @ expi, but would it be (strike -spread @ expi) or (spread @ expi- strike) from the LONG perspective? I would go for the second, any idea? Thanks, M.

from the LONG perspective : (spread @ expi- strike) x NP x risk factor

it depends on if you’re long or short a call or put. you’re either short a call or long a put in this example (on the SPREAD)

The payoff to the investor who is long the credit spread forward is = MAX [spread at expiration - strike spread, 0] x Notional Principal x Risk Factor The investor is taking a short position --> you know this because she is betting that spreads will decrease, while credit spread forwards only pay off when credit spreads increase (i.e. credit conditions worsen).

@FICC_chk "The payoff to the investor who is long the credit spread forward is = MAX [spread at expiration - strike spread, 0] x Notional Principal x Risk Factor " If it is Credit spread FORWARD, why did you use MAX in the formula. It is not an option ???

Just came across this question - quite tricky bit (schweser only got eg on long position and didnt say so). So in summary: Long position - investor expects credit to worsen and spread widen, so payoff will be Spread at maturity LESS Strike spread x Notional Amount x Risk factor. Short position - investor expects credit to improve and spread narrow, so payoff will be Strike spread Less Spread at maturity x Notional Amount x Risk factor. (Note no max bec the payoff is symmetrical)