In finance , a default option , credit default swaption or credit default option is an option to buy protection payer option or sell protection receiver option as a credit default swap on a specific reference credit with a specific maturity. The option is usually European , exercisable only at one date in the future at a specific strike price defined as a coupon on the credit default swap.

Credit default options on single credits are extinguished upon default without any cashflows, other than the upfront premium paid by the buyer of the option, of course. Therefore, buying a payer option is not a good protection against an actual default, only against a rise in the credit spread.

Credit default option - Wikipedia

This may explain why such options are very illiquid. They may also feature quite high implied volatilities, as shown by Damiano Brigo However options on credit indices such as iTraxx and CDX include any defaulted entities in the intrinsic value of the option when exercised.

This is expressed at times by stating that the options offer "front-end protection". Proper inclusion of front end protection complicates index options valuation, see for example Claus M. Pedersen , or Brigo and Morini From Wikipedia, the free encyclopedia. See also [ edit ] Option finance Credit default swap Credit derivative References [ edit ] Brigo, Damiano January Related Article at SSRN Pedersen, Claus M. Lehman Brothers Quantitative Credit Research.

Brigo, Damiano and Massimo Morini The no-armageddon pricing measure and the role of correlation after the subprime crisis".

Second Conference on the Mathematics of Credit Risk. Related SSRN article at [1] External links [ edit ] THE VALUATION OF CREDIT DEFAULT SWAP OPTIONS v t e. Credit spread Debit spread Exercise Expiration Moneyness Open interest Pin risk Risk-free interest rate Strike price the Greeks Volatility.

Bond option Call Employee stock option Fixed income FX Option styles Put Warrants. Asian Barrier Basket Binary Chooser Cliquet Commodore Compound Forward start Interest rate Lookback Mountain range Rainbow Swaption.

Credit Default Swap Options | Derivatives Risk Management Software & Pricing Analytics | FINCAD

Collar Covered call Fence Iron butterfly Iron condor Straddle Strangle Protective put Risk reversal. Back Bear Box Bull Butterfly Calendar Diagonal Intermarket Ratio Vertical. Binomial Black Black—Scholes model Finite difference Garman-Kohlhagen Margrabe's formula Put—call parity Simulation Real options valuation Trinomial Vanna—Volga pricing.

Amortising Asset Basis Conditional variance Constant maturity Correlation Credit default Currency Dividend Equity Forex Inflation Interest rate Overnight indexed Total return Variance Volatility Year-on-Year Inflation-Indexed Zero-Coupon Inflation-Indexed.

Contango Currency future Dividend future Forward market Forward price Forwards pricing Forward rate Futures pricing Interest rate future Margin Normal backwardation Single-stock futures Slippage Stock market index future. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Collateralized debt obligation CDO Constant proportion portfolio insurance Contract for difference Credit-linked note CLN Credit default option Credit derivative Equity-linked note ELN Equity derivative Foreign exchange derivative Fund derivative Interest rate derivative Mortgage-backed security Power reverse dual-currency note PRDC.

Consumer debt Corporate debt Government debt Great Recession Municipal debt Tax policy. Retrieved from " https: Options finance Economics and finance stubs. Navigation menu Personal tools Not logged in Talk Contributions Create account Log in. Views Read Edit View history. Navigation Main page Contents Featured content Current events Random article Donate to Wikipedia Wikipedia store. Interaction Help About Wikipedia Community portal Recent changes Contact page.

Tools What links here Related changes Upload file Special pages Permanent link Page information Wikidata item Cite this page. This page was last edited on 10 February , at Text is available under the Creative Commons Attribution-ShareAlike License ; additional terms may apply.

Credit Default Swap (CDS)

By using this site, you agree to the Terms of Use and Privacy Policy. Privacy policy About Wikipedia Disclaimers Contact Wikipedia Developers Cookie statement Mobile view.

Terms Credit spread Debit spread Exercise Expiration Moneyness Open interest Pin risk Risk-free interest rate Strike price the Greeks Volatility. This economics -related article is a stub. You can help Wikipedia by expanding it.