The Credit Default Swap Option

Frederikke Lindgren

Studenteropgave: Kandidatafhandlinger


During the financial crisis the demand for exotic derivatives decreased. However, the market for exotic derivatives among them CDS options has grown tremendously ever since. This thesis presents a necessary guideline on how to investigate the market of a new instrument. In this thesis we will investigate the market for the Credit Default Swap Option - A credit instrument in which there exists very little literature about. I discuss the underlying Credit Default Swap, the market for the CDS and the market for the CDS option. Combining extensive literature on valuing CDS options I arrive at an extension of the Black- Scholes formula. Thereby I succeed in pricing the CDS option. Empirically I manage to successfully calibrate the survival probability of a reference entity and by that I am able to calculate the option price on a CDS. I hope with this thesis that I can discover if the CDS option makes a di↵erence – in terms of money or risk - to investors, financial institutions, companies or even to private individuals. Using data from the CDS option market I expect to find both signs of speculative trading and indications that investors use the CDS option to reduce risk exposure.

UddannelserCand.merc.aef Applied Economics and Finance, (Kandidatuddannelse) Afsluttende afhandling
Antal sider94