Options Question

soddy1979 · December 28, 2011, 4:07pm

I have a quick question on options exchanges. Does an exchange like CBOE or LIFFE provide protection against counterparty risk in the event the option expires ITM, or does it just provide protection against counterparty risk for when the contract is written?

ohai · December 28, 2011, 4:12pm

The exchanges guarantee the contracts - this is one of their main purposes. I don’t understand the second part: “or does it just provide protection against counterparty risk for when the contract is written”. Does this just refer to initial settlement?

soddy1979 · December 28, 2011, 4:15pm

Thanks Ohai - yes I was just referring to initial settlement with the second part.

LBriscoe · December 28, 2011, 5:15pm

This is why you can “borrow” money (with the appropriate strategy) on the options exchanges at the risk free rate. Not a bad way to get cheap financing.