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CDS cheapest-to-deliver option
when default, CDS buyer has right to deliver a cheapest bond, must the bond be issued by the same company? or any bond at the same credit rating? Could you also please recommend good papers how to price this option for CDS? thanks in advance.
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- frattyquant
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CDS cheapest-to-deliver option
It depends on the way the CDS contract is written. If the Contract references a particular bond, that only that one must be delivered. Often it might say something like only senior debt, in which case any outstanding senior bond can be delivered. You'd have to look at ISDA documentation to understand what is deliverable under a particular contract. Once you figure that out, valuing the CTD should be pretty easy.