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Credit Spread Call Option

A credit spread option which gives the holder the right, but not the obligation, to buy a defaultable reference bond at a preset strike credit spread over a default-free comparable bond (such as Treasury bonds). This option allows investors to capitalize on or hedge against upward changes in credit spreads. It is also possible by this option to trade forward credit spread upward expectations separately from interest rate movements. Furthermore, a credit spread call can also be used to protect portfolios against having to buy overpriced assets at prohibitive prices.


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