That makes sense.Hi @lianne
On a basic level, I think it's the same: writing (selling) an option collects the premium up-front such that the counterparty, who is long, incurs the credit risk, but not the short. While the credit risk to the long differs between call (unlimited) and put (limited), and also depends on right-way and wrong-way risk (the classic example is a put option on a counterparty's own asset value: the put value increases as the counterparty's value decreases), in both cases the short (if the short has received the premium) is free of credit risk. I hope that helps!
From my point of view, as long as you are expecting to receive a payment in the future, then you attract CCR as you face the risk to not being paid. Now looking at the EBA FAQ, I interpret that point only for standard option which have the payment upfront and not more customized options with forward payment.
Interesting thread...what is the significance of the netting set and would this sold option potentially invoke wrong way risk?In fact for an option not in a netting set you have 2 possibilities:
- the option will be exercised and will cost you something
- the option is not exercised and will be worthless
So to be conservative, your credit exposure is the discounted premium (and your MtM will be the sum of your discounted premium and the option value which is negative for the writer)
If the premium is deferred then yes, there will be CCR, and potential MTM revaluation issuesHi, I know this is an old thread but my colleague and I were just discussing this. A short option with late delivery and physical settlement clearly has counterparty credit risk, do you agree? If the counterparty exercises, we will be exposed to the underlying which might carry CCR. Another example would be a short swaption. If the swaption is exercised, we will be left with a swap which has counterparty credit risk. Am I seeing this correctly?