- Joined
- 5/2/06
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- 12,166
- Points
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http://www.cboe.com/micro/credit/introduction.aspx
CEBOs in Brief:
CEBOs in Brief:
- CEBOs are modified, European-style cash settled binary call options. A credit event is predicated on the ability of a reference entity, e.g., Advanced Micro Devices (AMD), to meet their financial obligations to repay their corporate debt.
- The option's premium reflects the probability that a bankruptcy/credit event will occur prior to the contracts scheduled expiration. A premium of 0.11 indicates approximately an 11% chance that a bankruptcy will occur to the reference entity sometime during the option's life.
- CEBO's have a pre-determined fixed Recovery Rate (the company's residual value after Bankruptcy) of zero for Single- Names and 0.40 for Baskets. The guesswork regarding bankruptcy valuation is eliminated and payment will be expedited and timely.
- If a specified credit event, e.g., BANKRUPTCY is declared the contract settles at $1, its maximum level. The recovery rate is zero, therefore the full payout is awarded ($1 - recovery rate (0)) which translates into a $1000 settlement amount, due to the 1000x multiplier ($1 x 1000). If the entity remains SOLVENT at expiration the contract expires worthless ($0).
- CEBOs will be quoted in penny $.01 increments and trade between $0.00 and $1.00, i.e., 0.11, 0.12, 0.13...with a minimum tick value of $10 (.01 x 1000).
- CEBOs can be conveniently traded out of a securities account, therefore making it an attractive method for equity traders to trade credit
