Credit spread option ($N{A}_T(s_T-K{)}^{+}$)

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.