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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. Therefore, buying a payer option is not a good protection against an actual default, only against a rise in the credit spread. This may
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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
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124:"Arbitrage-free pricing of Credit Index Options. The no-armageddon pricing measure and the role of correlation after the subprime crisis"
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explain why such options are very illiquid. They may also feature quite high implied volatilities, as shown by
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Brigo, Damiano (January 2005). "Market Models for CDS Options and
Callable Floaters".
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on a specific reference credit with a specific maturity. The option is usually
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Pedersen, Claus M. (2003). "Valuation of
Portfolio Credit Default Swaptions".
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to buy protection (payer option) or sell protection (receiver option) as a
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Second
Conference on the Mathematics of Credit Risk
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56:(2005). However options on credit indices such as
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48:defined as a coupon on the credit default swap.
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161:The Valuation of Credit Default Swap Options
115:Lehman Brothers Quantitative Credit Research
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122:Brigo, Damiano and Massimo Morini (2008).
1013:Power reverse dual-currency note (PRDC)
953:Constant proportion portfolio insurance
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130:. Princeton University. Archived from
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948:Collateralized debt obligation (CDO)
69:(2003), or Brigo and Morini (2008).
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785:Zero-coupon inflation-indexed
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380:Callable bull/bear contract
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958:Contract for difference
259:Risk-free interest rate
108:Related Article at SSRN
26:credit default swaption
1104:-related article is a
740:Forward Rate Agreement
968:Credit default option
312:Employee stock option
30:credit default option
922:Inflation derivative
907:Commodity derivative
879:Single-stock futures
869:Normal backwardation
859:Interest rate future
700:Conditional variance
206:Derivative (finance)
1074:Business portal
927:Property derivative
84:Credit default swap
38:credit default swap
932:Weather derivative
917:Freight derivative
899:Exotic derivatives
819:Commodities future
506:Intermarket spread
269:Synthetic position
197:Derivatives market
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67:Claus M. Pedersen
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322:Fixed income
264:Strike price
132:the original
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1160:Credit risk
780:Zero Coupon
710:Correlation
658:Vanna–Volga
516:Iron condor
302:Bond option
140:article at
1149:Categories
1054:Tax policy
770:Volatility
680:Amortising
521:Jelly roll
456:Box spread
451:Backspread
443:Strategies
279:Volatility
274:the Greeks
239:Expiration
157:Alan White
95:References
1102:economics
745:Inflation
695:Commodity
653:Trinomial
588:Bachelier
580:Valuation
461:Butterfly
395:Commodore
244:Moneyness
153:John Hull
884:Slippage
814:Contango
798:Forwards
765:Variance
725:Dividend
720:Currency
633:Margrabe
628:Lattices
607:equation
593:Binomial
541:Strangle
536:Straddle
433:Swaption
415:Lookback
400:Compound
342:Warrants
317:European
297:American
289:Vanillas
254:Pin risk
234:Exercise
136:Related
73:See also
42:European
803:Futures
423:Rainbow
390:Cliquet
385:Chooser
365:Barrier
352:Exotics
214:Options
18:finance
864:Margin
730:Equity
623:Heston
526:Ladder
476:Condor
471:Collar
428:Spread
375:Binary
370:Basket
58:iTraxx
34:option
32:is an
1100:This
735:Forex
690:Basis
685:Asset
672:Swaps
598:Black
501:Fence
360:Asian
222:Terms
1106:stub
569:Bull
565:Bear
307:Call
155:and
138:SSRN
60:and
20:, a
337:Put
62:CDX
28:or
16:In
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