The Credit Risk of Compound Option Strategies

An institution active in listed or over-the-counter options for investment or risk management purposes often utilizes more than simple put or call positions to implement a given strategy; depending on the results it is attempting to achieve, it may use options in combinations which yield specific payoff or protection profiles not attainable through simple positions. In the previous chapter we have discussed the credit risk of standard put and call transactions. In this chapter we expand the discussion by exploring the credit risk of compound option strategies.