A swaption which grants the holder, as in a credit default swaption, the right to enter into an index default swap at a future expiration date for a prespecified strike. It differs from the credit default swaption in how defaults are managed. If a default event takes place in the underlying index within time to expiration, then the defaulted entity (name) will be removed from the underlying index default swap. Then, the default payment will be added to the option’s value at its expiration. Thanks to the liquidity of their underlying index default swaps (with new series being issued every six months), index default swaptions are created with short maturities (3-9 months).
Derivatives
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