An option (credit option) that provides credit protection to the holder based on two scenarios: default or no default. It entails that the seller pays out a fixed amount if and when a default event (or a credit event such as a rating downgrade) occurs with respect to a reference credit such as the case when the reference entity (issuer) fails to pay its obligations on the due date. At maturity, if the reference credit has defaulted the option holder receives a predetermined payout. If no default has occurred at maturity, the option holder receives nothing and forgoes the premium paid to the seller.
November 13, 2023