Can anybody suggest why options on the yield spread between corporate bonds and duration matched government bonds don't trade as a liquid market? I would have thought that such options would provide a short term, cheap and easy alternative to credit default swaps. Is it really just a fear of manipulation of the underlying market or is there more to it?

I dont know how liquid the credit spread option are. Perhaps not very liquid because the model risk is large.Does anyone know any source for quotes on such products?

QuoteOriginally posted by: XKECan anybody suggest why options on the yield spread between corporate bonds and duration matched government bonds don't trade as a liquid market? I would have thought that such options would provide a short term, cheap and easy alternative to credit default swaps. Is it really just a fear of manipulation of the underlying market or is there more to it?credit spread options do trade, although not normally to goveys...spreads are naturally compared to Libor, not governments in credit.one reason default swaps are popular is that, if held to maturity, it is a credit trade, whereas if you buy a spread option there will be market risk involved, and, you will be exposed to the implied vol moves of spreads...this may not be desirable if all you want to do is hedge a credit.

As Nonius already said: They do trade, but ATM only. Don't think anyone feels comfortable with modeling kurtosis and skewness in Credit Spreads.You can't get quotes easily at the moment.

Thanks for the feedback, when I first started the thread at the end of last year there seemed to be only a little interest in developing the next generation of credit derivatives e.g. default swaptions and credit spread options. However in the last couple of months this sentiment seems to be changing, the May issue of Risk carried a lead article on default swaptions and I'm hearing that brokers are starting to push the product.It seems to me that in the event of a more stable global economy with less default risk that these products, especially credit spread options, could steal some of the limelight that CDS has enjoyed.Is this what other Wilmotters are seeing too?Could credit option products like these be the next big quant thing?

QuoteOriginally posted by: XKEThanks for the feedback, when I first started the thread at the end of last year there seemed to be only a little interest in developing the next generation of credit derivatives e.g. default swaptions and credit spread options. However in the last couple of months this sentiment seems to be changing, the May issue of Risk carried a lead article on default swaptions and I'm hearing that brokers are starting to push the product.It seems to me that in the event of a more stable global economy with less default risk that these products, especially credit spread options, could steal some of the limelight that CDS has enjoyed.Is this what other Wilmotters are seeing too?Could credit option products like these be the next big quant thing?a default swaption is a natural part of decomposing an asset swap package on a callable bond.

QuoteOriginally posted by: XKEIt seems to me that in the event of a more stable global economy with less default risk that these products, especially credit spread options, could steal some of the limelight that CDS has enjoyed.I heard from a few pros that Spreads now are pretty low and the CDS trading desks, at least the flows, are starting to make way much less money (product's development law) as more competitors enter the market and credit quality of names like France Tel, Alcatel, are improving. So having less default risk is might not be the easy way.