Business and Personal Finance Dictionary
# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
- CREDIT OPTION
Definition: An Option with a payoff that depends on credit quality, without bearing ordinary interest-rate risk. Example: The Option to Exchange private debt for U.S. Treasury debt. Natural Buyers and Sellers: See Credit Derivatives. Pricing: Pricing an Option to Exchange () private and Treasury debt would involve a hybrid option model, having characteristics of equity and debt option pricing. Hedging: One could try to dynamically hedge the delta risks. Comment: Pricing and hedging might be difficult, and market manipulation may be an issue for a thinly traded underlying instrument.Back