Page 41 - PRIAA Glossary

COVERED OPTION
A trading strategy whereby a written financial instrument
is matched by an opposing cash or stock position in the underlying asset or by an opposing financial instrument position of specific characteristics. An example is when
an investor has a short-term neutral view on the asset
and for this reason the investor holds the asset long and simultaneously has a short position via an option to generate income from the option premium.
CRACK SPREAD
A calculation of the worth of a barrel of crude oil in terms
of the value of its refined products, such as gasoline and heating oil. Crack spreads may be based on a variety of refinery models and also depend on the type of crude input.
CREDIT CONTINGENT THRESHOLD
A threshold for collateralisation purposes that is contingent on the credit rating of a party. In the event that a party’s credit rating changes, the threshold either reduces or increases. Minimum transfer amounts can also be credit- rating contingent.
CREDIT DEFAULT SWAP (CDS)
The simplest credit derivative contract, designed to isolate credit risk and allow it to be transferred between parties. In a single name and index credit default swap (CDS), the credit risk of a reference entity is transferred from protection buyer to protection seller. In return, the protection buyer pays the seller a fixed rate premium over the life of the CDS transaction or until a credit event occurs, in which case there is a compensatory payment made from the protection seller to the protection buyer.
CREDIT DERIVATIVE
An over-the-counter (OTC) financial derivative instrument that allows a lender or borrower to transfer the default risk
of a loan to a third party. The lending party enters into an agreement (swap/option) with a counterparty (usually another lender), who agrees, for a fee, to cover any losses incurred in the event that the borrower defaults. If the borrower does not default, then the insuring counterparty pays nothing to the original lender and keeps the fee as a gain.
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