Credit Spread Put Option

So…, Example 14 in R30 in CFAI (pg 127), solution to 3 states “a credit spread put option where the underlying is the level of the credit spread is useful if one believes that credit spread will decline.” I’m confused…, shouldn’t it be…, if the credit spread widens (increases)? What am I missing?

If you read solutions to 3 and 4, it is consistent but like you said, doesn’t make sense. I just watched this video and it explained the complete opposite: http://www.youtube.com/watch?v=altg-wl0ZdQ Possible errata?

Just checked page 125, maybe it’s not errata as this formula is presented as a call option: Payoff = Max[(Spread at option maturity - K)*Notional*Risk Factor, 0] K is the strike spread, so call increases in value if spread widens.

Good point, the formula is for a call and I get that (I think) and solution 3 is for a put so it should basically just be viewed from the opposite perspective as a call. That is, a decline in spread increases the value of the put option, but the example is assuming spreads widen and therefore would not be useful.

Thanks for the help bp…

bpdulog Wrote: ------------------------------------------------------- > If you read solutions to 3 and 4, it is consistent > but like you said, doesn’t make sense. > > I just watched this video and it explained the > complete opposite: > > http://www.youtube.com/watch?v=altg-wl0ZdQ > > Possible errata? The guy on youtube didn’t read the curriculum. :smiley:

deriv108 Wrote: ------------------------------------------------------- > bpdulog Wrote: > -------------------------------------------------- > ----- > > If you read solutions to 3 and 4, it is > consistent > > but like you said, doesn’t make sense. > > > > I just watched this video and it explained the > > complete opposite: > > > > http://www.youtube.com/watch?v=altg-wl0ZdQ > > > > Possible errata? > > The guy on youtube didn’t read the curriculum. :smiley: I don’t know/think that video is geared towards CFA, he teaches FRM as well.