Credit spread forward max gain/loss

[danv0330]

are we assuming that the spread lower bound is zero?.. assuming you short a spread at 300bps and it narrow to the point that it now trades at a premium?

 

[MrSmart]

You can’t have a spread below zero, that would be your maximum loss if you’re long.

 

[danv0330]

Bond A 5%
Bond B 2%
credit spread forward at 300bps..
6 months later
Bond A 1%
Bond B 2%
is the spread now negative?

 

[sharky7]

Yesterday I come across a credit spread forward question and I wondered the same (although I don’t think we’ll see this in the exam):
If I’m long a credit forward, I will be paid if spreads widen, and pay if spreads tighten, but… if spreads contract in such a way that become negative, should I get paid as well? In theory I pay (Y1 - Y0) so if (3-5) I’d have to pay -2 which is a gain.
Unless there is a lower bound at zero.

 

[MrSmart]

danv0330 wrote:
Bond A 5%
Bond B 2%
credit spread forward at 300bps..
6 months later
Bond A 1%
Bond B 2%
is the spread now negative?

It’s a credit spread, the benchmark is treasuries.
Corporate bonds cannot have a lower overall yield, assumeing the difference is soley credit spread, then the farthest it can fall to is zero.

 

[danv0330]

AHHhh yes.. benchmark is Treasuries..WOW this would be a good exam question to me..
for some reason I was thinking about 2 corporates like a Microsoft and GE bond, but I guess there are no credit spread forwards for such a trade