A credit default swap (CDS) option, or credit default swaption,
is a contract that provides the holder with the right, but not the
obligation, to enter into a credit default swap in the future. CDS
options can either be payer swaptions or receiver swaptions. If a
payer swaption, the option holder has the right to enter into a CDS
where they pay premiums; and, if a receiver swaption, the option holder
receives premiums. Financial
Instruments Toolbox™ software provides
cdsoptprice for pricing payer and receiver
credit default swaptions. Also, with some additional steps,
cdsoptprice can be used for pricing multi-name
CDS index options.
O'Kane, D., Modelling Single-name and Multi-name Credit Derivatives, Wiley, 2008.