CDS Delivery Option: Better Pricing of Credit Default Swaps

INTRODUCTION

The emperor has no clothes. Three of 2008's more dismal events illustrate the point:

• More than twenty of the world's largest banks and securities firms, most with carefully cultivated reputations for excellence in risk management, reported combined losses of $500 billion from investments in subprime mortgages and their derivatives (according to Bloomberg News).
• Bear Stearns, a firm that prided itself on its acumen with structured mortgage products, was bailed out by the Federal Reserve and merged with JPMorgan Chase after troubles that had begun a year earlier in two of its hedge funds. In just a few months' time, funds that had ...