Two parties enter into a credit default swap option agreement, what happens when the underlying loan is defaulted - The option is nullified? please explain
The protection buyer will receive payment from the protection seller.
Historically this often phtysical - The protection buyer in effect sells the bond protection seller for Par.
Now it is more cah settlement where a “price” is decided for for the bond and the protection seller pays the difference between the “price” and par. This process is often via an auction.
With TRS the contract terminates. The receive would receive fair value of the underlying asset. Similar to above.
This has a lot more detail.
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Thank you Mikey - let me have a read - In summary, the option in a credit default swap option agreement is nullified or expires naturally after it is exercised upon the occurrence of a credit event and the subsequent settlement between the parties?
I don’t know what you mean by nullified.
If the underlyng defaults. The option is exercised.
if the underlying does not default the option just expires.
Hi Mikey - in a swap - if say the size = 10mil$ ; Cpn -61bpsp.a - what does it mean - when there is a Lev:x25?
In a credit default swap (CDS) option agreement, if the underlying loan defaults, the protection buyer can exercise the option. This entitles them to receive compensation from the protection seller to cover the losses incurred. The option itself remains valid, allowing the protection buyer to mitigate the financial impact of the default.
Do you want to provide more details.