Can someone please help - in Vol 1 Exam 2 Q So it seems like in both scenario, option holder will be beneficial if ref rate increases beyond the strike price, correct? A binary credit put option is based on ratings downgrade especially from investment grade to below-investment grade.

I am concerned about ratings downgrade and would like to put the bond back to issuer in case such downgrade occurs. Then put option will expire out of money and payoff will be 0. As far as I know, Credit Spread Put is different from Binary Credit Put option.

The first one described by you shall be Binary Credit Put option. Binary credit options based on default of underlying asset equivalent to credit put option if based on credit rating of underlying asset. Binary credit options based on default of underlying asset referred to as credit put option if based on credit rating of underlying asset.

From my memory, Schwezer notes only mention the more common 2 options, binary credit puts and credit spread call.

However, there are actually 4 in the CFA text. Nevertheless, the less common 2 options are discussed very briefly in CFA text and easy to be missed. I know it may look counter-intuitive to have binary credit calls and credit spread put.

There is a couple example or EOC Qs in the text regarding these 4 types. I will take a look tonite and post where it is. Besides, I also had the some problems with the explanation on Vol 1 Exam 2 Q Well, I will take a look tonite.

Not completely sure though.

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For Credit Spread Call- you are betting through the use of an option that Spreads are going to increase.

Spread - strike spread X Notional X Risk Factor. If you are out of the money then you lose your premium. Credit Spread Put- you are betting through the use of an option that Spreads are going to narrow.

Strike spread - spread X Notional X Risk Factor. Because spread is affected not only by credit rating, but also other factors. I think price up is good or credit spreads go down are good and no need to protect, is it that these 2 options enable investors to take advantage of price up or credit spreads go down? I think price up or credit spreads go down are good and no need to protect, is it that these 2 options enable investors to take advantage of price up or credit spreads go down?

If so, this is intuitive for binary credit call to buy but it seems do not make sense for credit spread put to sell.

Please disregard my previous post. For credit spread calls and puts, it can be either used as protection or making bets based on the mgr.

I believe Schweser Vol 1 Exam 2 Q I will make an errata reporting tonite. So if you are a buyer of a credit forward, you gain if spreads widen? Same thing with credit option call spread contracts. You gain when spreads widen? You and your counterparty in a credit spread forward bet on different direction of credit spread in order to either hedge an existing bond position or just speculating.

In order to protect yourself, you purchase a 3-mo. The payment may not exactly match your bond A lose value, depending on how you set up the risk factor in the contract initially. Your gain from the forward somewhat offsets your loss from bond A position. Note that you will end up pay your counterparty instead if the credit spread turns narrower at contract maturity. At the same time, your loss offsets by your gain from bond A position to certain extent.

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There is a variety of derivatives to hedge different risks. They use specific derivatives to modify their exposures. James…that made a lot of sense…I seem to be using only half my brain these days it seems.

Actually all your questions were valid ones. We are all here because we search for answers and help others to search theirs.

It really helps to answer exam Qs especially some of the AM essays. Credit options aka binary options Related to price of the underlying.

Can be a call bet price is going up or put bet price is going down. Price action itself does not trigger a payoff, has to violate one of the terms in the contract that would define a credit event. Related to credit spread of the option. Can be a call bet spread is widening or a put be spread is tightening. Credit spread movement is itself considered a credit event, so no need to evaluate as seperate factor.

Related to credit spread of option. Valued like a usual forward, but as opposed to just a spread or reference rate, specifically refers to the credit spread.

Sell CDS contract, receive upfront and periodic premia; forced to deliver predetermined value in case of credit event again, what defines a credit event? Buy credit spread calls the underlying is the credit spread, which will increase if credit risk goes up Buy credit spread forwards.

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Then make sure you did everything you could to prepare—enroll in a review workshop to ace it on exam day. I would also like to know. Think i can explain it more precisely …. FOR BINARY PUT OPTION A binary credit put option is based on ratings downgrade especially from investment grade to below-investment grade. AMC May 11th, Correct me if I am wrong! As far as i understand this topic, under credit options we have: Binary credit options based on default of underlying asset equivalent to credit put option if based on credit rating of underlying asset 2.

Binary credit options based on default of underlying asset referred to as credit put option if based on credit rating of underlying asset 2.

James Houston May 11th, I went into the same question as grgkir a couple of months ago. GMofDen May 11th, MrGrey May 11th, 1: GMofDen May 11th, 1: The info is in the CFA book 4 right around page AMC May 11th, 8: James Houston May 12th, AMC May 12th, 7: James Houston , Agree with your explanation. James Houston May 13th, 1: This is how I think about these: Credit spread movement is itself considered a credit event, so no need to evaluate as seperate factor Credit forwards: Valued like a usual forward, but as opposed to just a spread or reference rate, specifically refers to the credit spread Credit swaps: CDS is most common; can: I hope this was helpful, it was as much helping clarify as helping me remember all of this.

James - only just followed this thread up. To protect an asset against credit risk, there are basically these choices: CFA Forums CFA General Discussion CFA Level I Forum CFA Level II Forum CFA Level III Forum CFA Hook Up Upcoming Events jun Fitch Learning - Toronto - Top 10 Common Pitfalls to Avoid - FREE EVENT. About AnalystForum AnalystForum is an online community designed exclusively for CFA candidates and charterholders to discuss the Chartered Financial Analyst program.