CDS Delivery Option: Better Pricing of Credit Default Swaps

5 The Squeeze

Before applying this methodology to credit default swaps, it is worth noting that, unlike in the credit derivatives market, deliveries in Treasury futures happen all the time. Treasury futures expire each quarter, and, although deliveries are typically not large, futures traders get to see them quite regularly. This regular observation has given Treasury futures basis traders a unique perspective from which to evaluate the delivery option in credit default swaps. Unlike an academic, who might have to sit in an office smoking a pipe to imagine the ramifications of delivery option, a trader sees it happening over and over again. Rather ...