Optioner p a Credit Default Swaps

Vörts Trine

Student thesis: Master thesis

Abstract

A few years before the nancial crisis of 2008 the interest in CDS options increased, whilst during the nancial crisis itself the trading of these instruments stood still. However, the market for CDS options has grown strongly and steadily ever since. The purpose of this thesis is to describe and investigate CDS options, trying to achieve a greater understanding of the growth in the market for CDS options. I consider the underlying Credit Default Swap and the CDS option and discuss the market for CDS options and the use of these in practice. Based on Brigo's market model from 2005, I develop a price formula for CDS options. Empirically I nd the survival probability of two di erent reference entities before and during the nancial crisis of 2008 as well as today. Finally, I calculate the prices of CDS options and discuss the results. From the calculated prices of CDS options I conclude that the spread has to increase relatively before the buyer of a payer CDS option pro ts from it. The possibility of making pro t is higher when there is greater volatility in the market, which seems to be the case, especially in today's market. The results indicate the possibility for speculation.

EducationsMSc in Mathematics , (Graduate Programme) Final Thesis
LanguageDanish
Publication date2015
Number of pages97