Investopedia

Continue to Site »

Credit Spread Option

Filed Under » , ,
Dictionary Says

Definition of 'Credit Spread Option'

A financial derivative contract that transfers credit risk from one party to another. An initial premium is paid by the buyer in exchange for potential cash flows if a given credit spread changes from its current level.

The buyer of a credit spread option will receive cash flows if the credit spread between two specific benchmarks widens or narrows. Credit spread options come in the form of both calls and puts, allowing both long and short credit positions.
Investopedia Says

Investopedia explains 'Credit Spread Option'

Credit spread options can be issued by holders of a specific company's debt to hedge against the risk of a negative credit event. The buyer of the credit spread option (call) assumes all or a portion of the risk of default, and will pay the option seller if the spread between the company's debt and a benchmark level (such as LIBOR) grows.

Options and other derivatives based on credit spreads are vital tools for managing the risks associated with lower-rated bonds and debt.


Articles Of Interest

  1.

    Are Derivatives Safe For Retail Investors?

    These vehicles have gotten a bad rap in the press. Find out whether they deserve it.

  2. Vertical Bull and Bear Credit Spreads

    This trading strategy is an excellent limited-risk strategy that can be used with equity as well as commodity and futures options.

  3. Iron Condors: Wing It To Maximum Profit

    Understanding the right way to execute an iron condor can increase potential returns and limit risk.

  4. Understanding Option Pricing

    Take advantage of stock movements by getting to know these derivatives.

  5. Advanced Bond Concepts

    Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.

  6. Arbitrage Squeezes Profit From Market Inefficiency

    This influential strategy capitalizes on the relationship between price and liquidity.

  7. Making It Big On Wall Street

    Read about some of the most glamorous Wall Street jobs and what it takes to land one.

  8. Quants: The Rocket Scientists Of Wall Street

    Blend math, finance and computer skills to command a high - and well deserved - salary.

  9. Why Your Pension Plan Has Sovereign Debt In It

    One type of security pensions tend to invest in is sovereign debt, or debt issued by a government.

  10. Build A Baby Berkshire

    Get a piece of Warren Buffett's profit by using Form 13F to coattail his picks.
comments powered by Disqus
Marketplace
Hot Definitions

  1. Abatement Cost

    A cost borne by many businesses for the removal and/or reduction of an undesirable item that they have created.

  2. Validation Period

    The amount of time necessary for the premium on an insurance policy to cover the commissions, the cost of investigation, medical exams and other expenses associated with the issuance of the policy.

  3. Winner's Curse

    Because of incomplete information, emotions or any other number of factors regarding the item being auctioned, bidders can have a difficult time determining the item's intrinsic value. As a result, the largest overestimation of an item's value ends up winning the auction.

  4. Glocalization

    A combination of the words "globalization" and "localization" used to describe a product or service that is developed and distributed globally, but is also fashioned to accommodate the user or consumer in a local market.

  5. Disaster Loss

    A special type of tax-deductible loss, similar to a casualty loss, where a loss has been incurred by taxpayers who reside in an area that has been designated as a federal disaster area by the President.

  6. Fool In The Shower

    The notion that changes or policies designed to alter the course of the economy should be done slowly, rather than all at once.
Trading Center