CDS Delivery Option: Better Pricing of Credit Default Swaps

7 Delphi: A Real-World Example

Delphi, an auto-parts manufacturer and one-time division of General Motors, declared bankruptcy on October 8, 2005, and serves as a useful laboratory for our study of the delivery option. At the time of bankruptcy, the notional amount of derivatives outstanding was estimated at more than $20 billion by the International Swaps and Derivatives Association (ISDA), and some estimates were as high as $30 billion. These are staggering sums when compared to the $2 billion in underlying notes issued by the company and about the same amount of bank loans, which were also eligible for delivery into default swaps. The fact ...