Credit Default Swap Option

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.

References

O'Kane, D., Modelling Single-name and Multi-name Credit Derivatives, Wiley, 2008.