Payer/Receiver Options CDS

CFA Level III Fixed Income
#1

The payer and receiver option on CDS index in LIII reading 14, Credit Strategies, is a bit counter intuitive. The receiver option pays premium for right to sell protection on CDS index contract at a future date; the payoff is: Max(credit spread at expiration - CDS credit spread strike, 0) - option premium.

Intuitively, I would think the payoff in the parentheses would be Max (CDS credit spread strike - credit spread at expiration, 0) etc. Given that the receiver has right to sell protection, wouldn’t they want spreads to narrow? Can anyone explain intuition here?

#3

I belive this to be a CFA error

If you are a payer with option to say for example buy protection at 6% (strike) this is profitable if strike > 6% at expiration. You want CDS at expiry > strike, ie. 7% > 6%. You could buy protection at 6% paying premium and sell protection at 7% receiving higher premiums.

Note the 2024 syllabus corrects this error

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