An option on a defaultable instrument, which is, as such, subject to default risk resulting from the probability that the instrument’s issuer could not honor its contractual obligations. For example, a financial firm issues an option on another firm’s debt instrument. If the debt issuer comes into a financial halt, the option’s issuer may also head into trouble with regard to the option it had issued.
A vulnerable option may also refer to an option which is subject to the risk of its writer becoming in default.
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