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?
wlL3
May 23, 2012, 11:19am
#2
where did you see -
Payoff= Max (0x ST-XL)-Max……-CL0+CH0 ?
P/L should include option premiums
cpk123
May 23, 2012, 11:21am
#3
Credit Spread is a Forward like contract isn’t it?
Payoff never includes premiums.
thx…
i think that must be the difference!
Payoff vs profit. Most definitely a distinction where CFAI can trip you up on the exam.
RTFQ!
you can also have options on spreads
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).
tulkuu
May 25, 2012, 6:03pm
#11
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.
cpk123
May 25, 2012, 6:22pm
#14
Vt = X2 - X1 – that part is right.
agree.
the book phrased as “value” instead of payoff. Which is more clear to me.