I have a quick question regarding CDSs. Why is it that the payoff on a CDS is based on the cheapest to deliver bond? I get that it is the rule for CDSs, but is there any intuition behind why the rule is this way?
Thanks in advance!
Is it because the protection buyer has to deliver bonds to the protection seller when the reference entity defaults? So, in order to maximize payoff, the CDS buyer would buy the lowest costing bond with the same seniority and deliver to seller?