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In finance, a credit spread, or net credit spread is an options strategy that involves a purchase of one option and a sale of another option in the same class and expiration but different strike prices. It is designed to make a profit when the spreads between the two options narrows.
A credit crunch (a credit squeeze, credit tightening or credit crisis) is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates.
The lower the credit rating, the higher the spread, thus reflecting the extra yield premium demanded for greater risk. Using this model we can describe returns of, say, an A-rated security in terms of movements in the AAA curve, plus movements (tightening or widening) in the credit spread.
In finance, the yield spread or credit spread is the difference between the quoted rates of return on two different investments, usually of different credit qualities but similar maturities. It is often an indication of the risk premium for one investment product over another. The phrase is a compound of yield and spread.
In finance, a spread trade (also known as a relative value trade) is the simultaneous purchase of one security and sale of a related security, called legs, as a unit.Spread trades are usually executed with options or futures contracts as the legs, but other securities are sometimes used.
In finance, a spread option is a type of option where the payoff is based on the difference in price between two underlying assets. For example, the two assets could be crude oil and heating oil; trading such an option might be of interest to oil refineries, whose profits are a function of the difference between these two prices.
The spread between the LIBOR (or swap) rate and the government bond yield of similar maturity is usually positive, meaning that private borrowing is at a premium above government borrowing. This spread is a measure of the difference in the risk tolerances of the lenders to the two types of borrowing.
For an MBS, the word "option" in option-adjusted spread relates primarily to the right of property owners, whose mortgages back the security, to prepay the mortgage amount. Since mortgage borrowers will tend to exercise this right when it is favourable for them and unfavourable for the bond-holder, buying an MBS implicitly involves selling an ...