Maybe this is a weird question, but suppose that, for some reason, one would like to write an (implicit) option whose payoff is indexed on the writer's CDS spread. I would like to know what would be a "fair" premium to charge for this option, knowing that there's no concrete hedging strategy available to the writer (which would require selling protection against its own default) ? Of course the term "fair" is quite vague and is actually part of my question.

Thanks in advance.

  • 2
    $\begingroup$ sounds like wrong way risk. $\endgroup$ – will Apr 10 '17 at 8:32
  • $\begingroup$ Expanding on that; the price for this option is only what your counterparrty is willing to pay. Unlikely to be much above zero unless the option receivable is high up in capital structure. $\endgroup$ – James Spencer-Lavan Jul 1 '17 at 6:30
  • $\begingroup$ EDIT: you could make it a digital default option that delivers value either in form of super senior bonds or from a specifically created ringfenced SPV $\endgroup$ – James Spencer-Lavan Jul 1 '17 at 6:36

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