Credit spread ($s=y_{\mathrm{credit}}-y_{\mathrm{benchmark}}$)

A yield difference between a credit-risky instrument and a chosen benchmark, with maturity and other terms matched as appropriate. The benchmark and quotation convention must be specified. The spread may compensate for default losses, default-risk premiums, liquidity and other effects; it is not generally identical to a physical default probability or loss rate.

An option with payoff linked to widening or narrowing of a specified credit spread. A simple spread-widening payoff has the displayed form, where $A_T$ is an annuity or settlement scale. This transfers spread-mark-to-market risk and need not require an actual default event. Pricing depends on spread volatility, discounting, default treatment and the settlement convention.