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 options.
E)its value increases as the risk premium on a specified benchmark bond of the borrower increases above some exercise spread and 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.

Question

Quizplus · Accepted Answer

Credit spread call options are useful because they provide protection to the lender against the borrower's credit risk as the value of the call option increases as the risk premium on a specified benchmark bond of the borrower increases above some exercise spread. Additionally, 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. Therefore, the correct answer is E.

Credit Spread Call Options Are Useful Because