NakedPuts00

Related question:

Given - "A call option the bank purchased from a dealer for $30. The current market price of the option is $35"

For the Banks long call option position, the most appropriate estimate of the amount of risk of a credit loss is

A. $0
B. $35
C. $30

NakedPuts00

SerGrey Wrote:
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> Right, but then for call buyer $6 will be price
> risk, not credit risk (becouse the other party
> doesn't have an obligation to pay $6 back).
> I am finally confused...

Market risk and credit risk are opposite to each other. Market risk is a risk that you will lose money due to adverse market moves. Credit risk is a risk that you will make money in the markets but the counter party will not pay off your gains. Let's look at the situation with an option. If A sells a call option to B for $6. A recieves $6 immediately and has no credit risk because there is no situation when B would owe anything to A. However, A's market risk is unlimited because if asset goes up to big time the call pay off will be very high. On the contrary, B's market risk is limited to the premium of $6 that he has already paid but the credit risk he is facing is huge because potentially call option can be very valuable if markets go up. Then current credit risk and potential credit risk are ways of looking at short term and long term credit risk of the position. Does that help?