Valuation models

CDS index options

Payer and receiver options on a credit index by Black's formula on the forward spread, adjusted for front-end protection, with CS01, vega and the payoff at expiry.

Inputs

Results

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Methodology

Conventions

  • Black on the forward spread, adjusted for front-end protection: index options do not knock out on default.

References

  • O'Kane, Modelling Single-name and Multi-name Credit Derivatives, ch. 11
  • Pedersen (2003), Valuation of Portfolio Credit Default Swaptions

Formulas

Adjusted forward
F′ = F + (1 − R)(1 − Q(tₑ)) D(tₑ) / RPV01(tₑ, T)
Payer
V = N f RPV01(tₑ, T) [F′ N(d₁) − K N(d₂)]