CDS-settlement

CFA Level II Fixed Income
#1

I don’t quite understand this cheapest to deliver concept.

If for instance two bonds are available, 1) trading at 40% of par 2) at 50% of par

And the CDS seller chooses 1 to settle (being cheaper), they will have to pay 100-40=60, which is more than the second option. 1 may be cheaper to buy, but don’t they end up paying more?

#2

Yes.

The CDS seller doesn’t _ choose _ to settle based on the cheaper price.

The CDS seller is contractually obligated to settle based on the cheaper price. That’s the nature of CDSs.

#3

Thanks!!

#4

You’re welcome.