CDS Delivery Option: Better Pricing of Credit Default Swaps

6 The Cheapest-to-Deliver Option in Credit Default Swaps

Default triggers physical delivery of a note in a single-name credit default swap. The foundation of the delivery option is that the buyers of protection have the right to decide which note to deliver, and presumably have paid a higher premium to gain that right. Typically, single-name credit default swaps are written so that any note from the issuer is deliverable as long as it has a maturity that is equal to or longer than the maturity of the swap, and the payment in exchange for the note is par. For example, if we create a default swap contract today that will expire in five years, and ...