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Derivatives

Credit Options Growth Triggers American-Style Talk

An increase in the volumes of credit options has set tongues wagging about the advent of options which can be exercised at any time over the tenor of the trade, also known as American-style options.

An increase in the volumes of credit options has set tongues wagging about the advent of options which can be exercised at any time over the tenor of the trade, also known as American-style options. "We have had inquiries [for American-style], but trading has not started yet," said one trader at a European house.

Demand is being driven by real-money clients who are attracted to the instruments because they can buy out-of-the-money options to hedge their investments. "They are like insurance policies with a certain payout," he said. An official at a London-based hedge fund, who trades credit options on a speculative basis, said his fund is interested in the instruments, but would hold off until there is obvious liquidity. "Consistency and a proven track record is the key for us," he said.

Credit options with set expiries, called European-style, gained traction last year, multiplying ten-fold in the third quarter (DW, 12/23). Three-month expiries are most common, but firms began offering prices on one-month expiries late last year.

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