Cookbook of CBOE Credit Event Binary Options (CEBO) - CBOE.com

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can only be automatically exercised once, after the confirmation of the first Credit Event in any basket component. After this exercise, the option expires. Full contract specifications are posted at: http://www.cboe.com/Products/indexopts/credit_spec.aspx b. Credit Events What is a Credit Event? CBOE can recognize bankruptcy, failure to pay 1 , debt restructuring and any other event of default specified in the terms of the relevant indenture as possible Credit Events. CBOE specifies which of these Credit Events apply to a particular CEBO on its listing date and this information is posted at : http://www.cboe.org/legal/crclReg_CREDIT.aspx Who Confirms Credit Events? CBOE confirms the occurrence of Credit Events. When and How Can Credit Events be Confirmed? Credit Events are determined based on at least two information sources. These sources can be public news services, regulatory agencies, other exchanges, the OCC or the courts. (The news services currently used by the Exchange are Bloomberg, Dow Jones News Services, the Wall Street Journal, the Financial Times or the New York Times). To be confirmed, a Credit Event must have occurred in the period extending from the listing time up to 10:59 pm Chicago time on the last day of trading (Credit Event confirmation period). CBOE has up to four business days after the scheduled last day of trading to determine and announce whether a Credit Event has occurred. Information announcing Credit Events will be posted on CBOE's website under CBOE's Contract Adjustments link: http://www.cboe.com/tradtool/contractscebo.aspx c. Succession and Redemption Events Succession and Redemption Events are two other types of events that can impact the trading and settlement of CEBOs. CBOE confirms the occurrence of 1 Failure to pay is defined as failure to pay the specified threshold amounts of interest and/or face value of debt obligations after applicable grace periods have elapsed. The threshold amounts are described in contract specifications. This definition also applies to debt obligations whose payment has been accelerated by a material violation of the covenants governing the obligations . 6
Succession and Redemption Events. Information announcing these events will be posted on CBOE's website under CBOE's Contract Adjustments link: http://www.cboe.com/tradtool/contractscebo.aspx A Redemption Event occurs when all the debt securities of the CEBO Reference Entity are redeemed or mature. Since zero debt leaves little room for a Credit Event, the expiration of a single-name CEBO is accelerated and it expires worthless. Redemptions of the debt of a component of a CEBO Single-Payout or Multiple- Payout basket only result in the removal of that component from the basket, however. The expiration of a CEBO Multiple-Payout basket is only accelerated after CBOE has confirmed a Redemption Event in every one of its components. In a Succession Event, part of or all the debt of the Reference Entity of a CEBO is transferred to other entities. This can occur following mergers, consolidations, spin-offs and similar corporate actions. CBOE will look to the terms of the Reference Obligation(s) to determine what percentages of the debt if any have been transferred to other entities. These terms may be discussed in indentures, supplemental indentures as well as 8-K and other SEC filings of the Reference Entity that discuss material changes to the company. If, based on these terms, CBOE determines that a company has acquired more than 25% of the original debt, it is deemed to be a “Successor Reference Entity.” The original company can be one of the successors, but it does not have to be. In the case where a Reference Entity is taken private, the private company may become the Successor Reference Entity if it guarantees the debt. However, new Credit Default Option series listings referenced to the private Successor Reference Entity would not be listed. If CBOE confirms a Succession Event for an entity referenced by a Single-Name CEBO, CBOE will generally list a new Single-Name CEBO for each Successor Reference Entity. If CBOE were to confirm a Credit Event in any Successor, the corresponding option would automatically pay an appropriate fraction of $100,000, e.g. $100,000 for a single successor, $50,000 for two successors, and $33,333 for three. If a Succession Event is confirmed for a component of a Multiple-Payout or Single-Payout CEBO basket, CBOE will determine Successor Reference Entities to replace that component in the CEBO basket. It will also specify weights and recovery rates for the Successor Reference Entities. These weights will add up to the weight of the original component. The recovery rates of the Successor Reference Entities can differ from the recovery rate of the basket component they replace. Hence the payouts may change. 7
Page 1 and 2: Cookbook of CBOE Credit Event Binar
Page 3 and 4: 1. Introduction Table of Contents 2
Page 5: (“Reference Entity”). A Credit
Page 9 and 10: e. Summary Table of Different CEBOs
Page 11 and 12: . Theoretical Pricing The theoretic
Page 13 and 14: Market Maker Haircuts Haircuts for
Page 15 and 16: • Hedge or take a position on the
Page 17: 7. Contact Information John Angelos

Cookbook of CBOE Credit Event Binary Options (CEBO) - CBOE.com

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