A credit default swap option that can be exercised only at expiration date. It is a European option on a credit default swap that allows the holder (the long) to get insurance against a specific reference entity defaulting on its debt. The holder will be able to enter into such a swap at the expiration date of the option. If on that date, exercising is favorable to the holder, the swap will be entered into. Otherwise, the option expires worthless and no credit default swap is concluded. In case the swap becomes effective, the protection buyer makes periodic payments to the protection seller at a preset fixed rate per year.
The payments continue until the end of the term of the contract or until a credit event occurs, whichever is earlier. If a credit event takes place, the protection buyer has the right to present a bond (the reference obligation or reference bond) issued by the reference entity to the protection seller in exchange for its face value.
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