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Initially, CBOE will list three Basket CEBO contracts: two based on specific industry sectors (automobile and homebuilder) and the third is a high-yield composite basket. Basket CEBO contracts pay out a cash amount upon the confirmation of a credit event in any of the components in the basket.
"CBOE's credit event contracts offer the advantages of transparent pricing, anonymous participation, the option of electronic trading and the operational efficiencies of standardized terms," said Joseph Levin, CBOE's vice president of research and product development."These are features that should appeal to a number of current credit market customers, as well as to investors who prefer the certainty of a listed market with triple-A rated clearing."
Basket CEBOs are call options based on a basket of reference entities (the basket components). The options automatically pay out a cash amount each time a credit event is confirmed in any of the basket components during the life of the contract. CBOE will determine when a triggering credit event has occurred, and resolution and payout is pre-determined and binding. After a payout, the basket component that had a credit event will be removed from the contract and the contract will continue on with one less entity in the basket. Subsequent payouts occur upon confirmation of credit events in the remaining components. The contracts will continue to trade until expiration or until all of the entities in the basket have confirmed credit events. If no credit event is confirmed in any basket component prior to expiration, the option will expire worthless.
|
Basket Name |
|
Expiration Month and Option Symbols |
|---|---|---|
|
|
|
Sept 2008 Sept 2012 |
|
Auto Sector Basket CEBO (7 components) |
|
AFY AFZ |
|
Homebuilder Basket CEBO (8 components) |
|
BBR BBS |
|
High-Yield Composite Basket CEBO (50 components) |
|
HAU HEU |
For each Basket CEBO class, CBOE will specify at the time of listing:
- The basket components
- Notional face value of the basket (e.g., $100,000)
- The weight of each basket component, which represents the fraction of the notional face value of the basket allocated to each basket component
- The recovery rate of each basket component
- The specified debt security that defines the reference obligation of each component (e.g., Corporation XYZ 8.375% July 2033 bond)
- The applicable credit event(s) that could trigger a payout
The payout amount for any basket component is a percentage of the notional face value, based on the weight of the component that experienced the event and its specified recovery rate. (For example: notional face value x component weight x (1-recovery rate) or $100,000 x .1 x (1 - 40%) = $6,000).
Jane Street Specialists has been named the Designated Primary Market Maker (DPM) in the Auto Sector and Homebuilder Basket CEBOs, while Susquehanna Investment Group has been named the DPM in the High-Yield Composite Basket CEBO.
The launch of Basket CEBOs follows the launch last month by CBOE of Single Name Credit Event Binary Options. Currently CBOE lists credit default options on four individual companies: General Motors Corporation (GM), Ford Motor Company (F), Hovnanian Enterprises, Inc. (HOV) and Standard Pacific Corp. (SPF). Single Name CEBOs are cash-settled call options that pay $100,000 when CBOE confirms that a credit event has occurred. If no credit event is confirmed, the option expires with no value.
Basket CEBOs and Single Name CEBOs can be traded electronically via the CBOE Hybrid Trading System. Trading hours are 8:30 a.m. to 3:00 p.m. C.T. Contract specifications, basket components and additional details are available at www.cboe.com/CREDIT.
CBOE, the largest options marketplace in the U.S. and the creator of listed options, is regulated by the Securities and Exchange Commission (SEC). For additional information about the CBOE and its products, visit the CBOE website at: www.cboe.com/.
