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A CDS Option Miscellany

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  • Richard J Martin
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    Abstract

    CDS options allow investors to express a view on spread volatility and obtain a wider range of payoffs than are possible with vanilla CDS. We give a detailed exposition of different types of single-name CDS option, including options with upfront protection payment, recovery options and recovery swaps, and also presents a new formula for the index option. The emphasis is on using the Black-76 formula where possible and ensuring consistency within asset classes. In the framework shown here the `armageddon event' does not require special attention.

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    File URL: http://arxiv.org/pdf/1201.0111
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1201.0111.

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    Date of creation: Dec 2011
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    Handle: RePEc:arx:papers:1201.0111

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    Web page: http://arxiv.org/

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    1. Max Bruche & Carlos González Aguado, 2006. "Recovery Rates, Default Probabilities And The Credit Cycle," Working Papers wp2006_0612, CEMFI.
    2. Hatem Ben-Ameur & Damiano Brigo & Eymen Errais, 2009. "A dynamic programming approach for pricing CDS and CDS options," Quantitative Finance, Taylor & Francis Journals, vol. 9(6), pages 717-726.
    3. Damiano Brigo & Naoufel El-Bachir, 2007. "An exact formula for default swaptions’ pricing in the SSRJD stochastic intensity model," ICMA Centre Discussion Papers in Finance icma-dp2007-14, Henley Business School, Reading University.
    4. Dirk Tasche, 2004. "The single risk factor approach to capital charges in case of correlated loss given default rates," Papers cond-mat/0402390, arXiv.org, revised Feb 2004.
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