Credit Event Binary Options contracts allow investors to express an opinion on whether a company will experience a "credit event" (bankruptcy). Due to inverse correlations between credit and equity markets, CEBO® contracts can be used as a hedging tool for individual stocks. The contracts also provide the advantages of price transparency available through a regulated exchange, currently unavailable in over-the-counter credit default swaps markets.These CBOEs are hence nothing but some a simplified and exchange traded version of the CDS. While they are presented as an equity hedging tool, they remain nothing less than a credit speculation one. Although the fact the only credit event accepted is the bankruptcy one, make their use quite tricker...
A CEBO contract has just two possible outcomes - a payout of a fixed amount if a credit event occurs or nothing if a credit event does not occur.
The CBOE, which first began trading single-name and basket Credit Event Binary Options in 2007, recently received SEC approval to amend the Credit Event Binary Options rules.
One change simplifies the terms of a payout for CEBO contracts, allowing CBOE to list CEBO contracts that specify bankruptcy as the only trigger for a payout.
The size of the CEBO contract payout if a credit event occurs has also been revised. If a bankruptcy occurs prior to expiration of the contract, the amount of the payout will be $1,000 per contract.
Here are some more details:
- CEBOs translate CDS exposure into a transparent exchange traded marketplace.
- CEBOs are binary options that pay fixed amounts upon a streamlined credit event, which may include bankruptcy only.
- CEBOs are similar to fixed recovery CDS contracts but are exchange traded and can be purchased with an upfront premium that can be margined.
- CEBO premiums reflect a company's discounted Probability-of-Default during the contract's life.
|Ticker||Reference Entity||Reference Obligation|
|AKS||AK STEEL CORPORATION||AKS 7.625% 2020 Sr. Notes|
|AMD||ADVANCED MICRO DEVICES, INC.||6.00% Convertible Senior Notes due 2015|
|ARM||MERITOR,INC formerly ARVINMERITOR, INC.||4.00% CONVERTIBLE SENIOR NOTES DUE 2027|
|AXL||AMERICAN AXLE & MANUFACTURING, INC.||9.25% Senior Secured Notes due 2017|
|HOV||K. HOVNANIAN ENTERPRISES, INC||61/4% Senior Notes Due 2016|
|HUN||HUNTSMAN INTERNATIONAL LLC||5 1/2 % Senior Notes due 2016|
|MBI||MBIA INC.||SENIOR INDENTURE (generic)|
|PMI||The PMI Group, Inc||Senior Debt Securities (generic)|
|SFD||SMITHFIELD FOODS, INC.,||Senior Debt Securities (generic)|
|THC||TENET HEALTHCARE CORPORATION||8 7/8% senior secured notes due 2019|