CDS Delivery Option: Better Pricing of Credit Default Swaps

2 The Crisis After Subprime

This is a book on pricing an embedded interest rate option in credit derivatives, and there are important parallels to the subprime debacle. The most important of these is that many traders in each market don't appreciate the fundamental assumptions behind each market. Although this is somewhat of a simplification, subprime mortgages relied on a certain rate of home price appreciation. Similarly, the value of a credit derivative depends on the price of a corporate bond. Credit salesmen and traders seem content to stop here, but a veteran of catastrophe might ask, “Which price, and for what bond?” Valuing the delivery ...