Option Payoff (include option premium or exclude??)

R25 Fixed Income Portfolio Mgt II

Credit Spread Option-

Payoff calculation= Max[(Spread at the option maturity-K) X Notional Amt X Risk Factor,0]

------ I don’t understand why the premium paid is not as a part of the consideration??

2009 Mock exam has questions provide the premium but didn’t incl in the payoff calculation… (But unfortunately I include…>

R37 Risk mgt Application of Option Strategies

eg, Bull call strategies.

Payoff= Max (0x ST-XL)-Max…-CL0+CH0

------ here counts all the premiums…

Maybe I am in the final stage… feeling stress& confused…

Pls someone can help?

where did you see -

Payoff= Max (0x ST-XL)-Max……-CL0+CH0 ?

P/L should include option premiums

Credit Spread is a Forward like contract isn’t it?

Payoff never includes premiums.

Only profit does…


i think that must be the difference!

Payoff vs profit. Most definitely a distinction where CFAI can trip you up on the exam.


you can also have options on spreads

^ or binary …

ok summary…

default risk

-must have event of default language

-hedged with options (binary) or credit default swaps

spread risk

-hedged with options (credit spread) or forwards

downgrade risk

-must have downgrade language

-hedged with options (binary) or credit default swaps

Confirmation from CFAI. In the 2009 exam, question 52 requires a payoff calculation and it does not include the cost of the opion premium (I included it and did not get the answer correct).

I ask this question again, because it tells the difference between payoff and profit.

What’s the payoff of a box spread?


Payoff is value of your position at time ==> VT

Profit is value of your position at 0 - at T==> VT - V0

Payoff of box spread is also VT-V0. One call and one put will always end up in the money so you will not hold the asset. Profit is risk free rate assuming no arbitrage.

Vt = X2 - X1 – that part is right.


the book phrased as “value” instead of payoff. Which is more clear to me.