lot of talk about this in the past…just want to confirm the idea. American option - option long always bears risk 1) if in the money, CURRENT credit risk is price of option (same as how much option is in the money) 2) If not in the money, POTENTIAL credit risk is current price of the option European option - option long always bears risk 1) no current risk ever 2) POTENTIAL risk is amount the option is in the money, OR current price of option. Thoughts???

I think even American option is not in the money , it still has market value ,which is potential credit risk

European option - current credit risk at expiration.

so… 2) If not in the money, POTENTIAL credit risk is current price of the option should read 2) If not in the money, CURRENT credit risk is current price of the option ???

Should be value is the current credit risk of American option. Also have we ever come to a conclusion, do we discount potential credit risk to PV?

American option - option long always bears risk 1) if in the money, CURRENT credit risk is ST-X if long (NOT THE PRICE) 2) If not in the money, POTENTIAL credit risk is current price of the option European option - option long always bears risk 1) no current risk until expiration 2) POTENTIAL risk is price of option. above is what I think

I still think in 3 months we have moved no further on this. Very ambiguous what credit risk is. Only thing people can agree on is it is borne by the long.

Paraguay - In the 2009 exam they do not discount the potential credit risk for a European option… I was going to say that potential credit risk of the european option is discounted to today, but went by what they did in 2009. Also to confirm your statement…american options have current risk = to option price no matter if they are in the money or not…its always = current premium of option???

I would believe it would always be value since you have paid time value and vol for the premium even if it is in or out of the money. Risk management is my weakest subject so I am not an expert.

Euro – only potential, only if you’re in the money, and it is equal to amount in the money. potential only exists at expo, so you look at the value you’re at risk for at expo. American – regardless of moneyness, current credit risk is market value. potential credit risk is amount in the money.

I think current credit risk to American is ST-X you can excercise it now , get st-x ,that is current credit risk

goodman2011 Wrote: ------------------------------------------------------- > American option - option long always bears risk > 1) if in the money, CURRENT credit risk is ST-X if > long (NOT THE PRICE) > 2) If not in the money, POTENTIAL credit risk is > current price of the option > > European option - option long always bears risk > 1) no current risk until expiration > 2) POTENTIAL risk is price of option. > Current credit risk: amounts due at present time not be paid, i.e., any payment due (from counterparty), not market value. Potential credit risk: Market value at a given time reflect potential credit risk, i.e., the value of the contract if the counterparty defaults now. Remember since it is ALREADY in TODAY’s market value, i.e., PV --> ALREADY discounted taking into account all possible scenarios of future credit risk–> no need to discount more Therefore, this is what I remember: American option - option long always bears risk 1) if in the money, CURRENT credit risk is current stock price - strike if long (NOT THE PRICE of the option) 2) POTENTIAL credit risk = current price of the option (INDEPENDENT whether it is in the money or not). European option - option long always bears risk 1) no current risk until expiration 2) POTENTIAL risk = price of option.

elcfa Wrote: ------------------------------------------------------- > goodman2011 Wrote: > -------------------------------------------------- > ----- > > American option - option long always bears risk > > > 1) if in the money, CURRENT credit risk is ST-X > if > > long (NOT THE PRICE) > > 2) If not in the money, POTENTIAL credit risk > is > > current price of the option > > > > European option - option long always bears risk > > > 1) no current risk until expiration > > 2) POTENTIAL risk is price of option. > > > > Current credit risk: amounts due at present time > not be paid, i.e., any payment due (from > counterparty), not market value. > > Potential credit risk: Market value at a given > time reflect potential credit risk, i.e., the > value of the contract if the counterparty defaults > now. Remember since it is ALREADY in TODAY’s > market value, i.e., PV --> ALREADY discounted > taking into account all possible scenarios of > future credit risk–> no need to discount more > > Therefore, this is what I remember: > > American option - option long always bears risk > 1) if in the money, CURRENT credit risk is > current stock price - strike if long (NOT THE > PRICE of the option) > 2) POTENTIAL credit risk = current price of the > option (INDEPENDENT whether it is in the money or > not). > > European option - option long always bears risk > 1) no current risk until expiration > 2) POTENTIAL risk = price of option. I like this, this is what I am going with.

Great post guys. I think goodman is good with what he said. I never saw options discounted btw either. Only forwards with our famous formula Long Forward = Spot / 1+f - forward / 1+d (if not at expiration of course)

In case it helps, here is a long thread I wrote earlier concerning credit risk and swap http://www.analystforum.com/phorums/read.php?13,1140934,1141044#msg-1141044