Default swaptions: the next frontier

Several dealers have begun to trade options on credit default swaps. But despite a race among dealers and brokers to establish themselves in this nascent market, the goal of a liquid market in credit volatility remains some way off. Navroz Patel reports

The structural increase in credit volatility in the past 18 months, coupled with increasing credit default swap (CDS) volumes is boosting interest in options on default swaps. “A handful of firms are now active in this market and are trying to get a generic options business started,” says the head of investment-grade credit derivatives at a US firm, who spoke to Risk on condition of anonymity. “Even if they doubt that the underlying [CDS] market can support a significant options business, they