Credit Spread Call Options Are Useful Because

question 23

Multiple Choice

Credit spread call options are useful because

• A)its value increases as the risk premium on a specified benchmark bond of the borrower increases above some exercise spread.
• B)an increase in the value of the call option will tend to offset the decreasing value of an FI's loan and net worth as the credit quality of the borrower decreases.
• C)they will always cause a loss at least equal to the required premium on the option.
• D)All of the above.
• E)Answers A and B only.

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