Credit spread option - Financial definition
Concise definition of the term credit spread option
Options on credit spreads, which allow investors to isolate credit risk from market risk and to express a view about an asset’s credit risk profile in the future.
Comprehensive definition of the term credit spread option
They can be used to earn income from the option premium, to profit from spread tightening or widening, and to buy securities on a forward basis at favorable prices.
Credit spread options are normally written on bonds. They represent a bilateral financial contract in which the protection buyer pays an up-front premium, and receives the present value of the difference between the spread prevailing on the exercise date between the yield of the reference obligation and some benchmark yield (usually Treasuries or LIBOR) and the strike spread, if positive (a credit spread cap or call), or alternatively if negative (a credit spread floor or put).