Hi everyone,
I wanted to have your insights on how to compute the current credit risk on an option.
Let's say we have are long the (plain vanilla) call on a stock. Strike Price=90, current stock price=60. Price of the call/premium=5. Time to Maturity=1 year.
Imagine that the counterparty selling this call option goes bankrupt at time t=0.5, thus before the maturity of the option.
In this case, we can assume that the premium (5) was paid at time=0. When the counterparty goes bankrupt at time t=0,5, the price of a similar option (Strike Price=90; time to maturity=0.5 to match the initial maturity date) is now 7.
Is the "current exposure " (I insist on "current", I am not interested in Potential Future Exposure) equals to 7 (let's assume it is just before the counterparty goes bankrupt)? According to me, the new price of 7 is the credit exposure because it represents the "replacement" value of the option.
Am I right? Or am I missing something?
Thank you!
Regards,
trabala38
I wanted to have your insights on how to compute the current credit risk on an option.
Let's say we have are long the (plain vanilla) call on a stock. Strike Price=90, current stock price=60. Price of the call/premium=5. Time to Maturity=1 year.
Imagine that the counterparty selling this call option goes bankrupt at time t=0.5, thus before the maturity of the option.
In this case, we can assume that the premium (5) was paid at time=0. When the counterparty goes bankrupt at time t=0,5, the price of a similar option (Strike Price=90; time to maturity=0.5 to match the initial maturity date) is now 7.
Is the "current exposure " (I insist on "current", I am not interested in Potential Future Exposure) equals to 7 (let's assume it is just before the counterparty goes bankrupt)? According to me, the new price of 7 is the credit exposure because it represents the "replacement" value of the option.
Am I right? Or am I missing something?
Thank you!
Regards,
trabala38
