Credit Spread Options

Credit Spread Options are options are options where payoff depends on either a particular credit spread or price of a credit-sensitive asset.
Credit spread options are designed to hedge against or capitalize on changes in credit spreads. A reference security is selected and strike spread and maturity are set. The payoff is based on whether the actual spot spread at the exercise date is over or under the spread on the reference security. The transaction may be either based on changes in a credit spread relative to a risk-free benchmark (e.g. LIBOR or U.S. Treasury) or changes in the relative spread between two credit instruments. It may be structured as an American or European option.