NEW YORK, Feb. 13 /PRNewswire/ -- Bloomberg L.P., the leading global provider of news, data and analytics, today announced the release of a new analytic function for pricing of Options on Credit Default Swap indices ("CDS"). The new function is accessible BLOOMBERG via CDSO < Go > on the BLOOMBERG PROFESSIONAL(R) service.
CDS Options, also called CDS Swaptions, grant the holder the right but not the obligation to enter a forward-start CDS contract to buy or sell protection, based on the market -level strike agreed upon today.
During periods of low credit activity, CDS options are providing market participants the ability to leverage volatility in a cost-effective and defined way. The Bloomberg CDSO function addresses the growth of the CDS options market and provides a powerful tool to help price these instruments.
"Credit option volumes grew dramatically in 2005, and we expect a continued broadening of the account base in 2006 as investors focus on the convexity profile of their portfolios, and expressing views on the likely trading range of spreads. Bloomberg's Options Calculator will allow consistent and transparent pricing of the most common option formats, thereby providing a common language for client dialogue. Its usage will support our drive to standardize and industrialize credit options as a flow product, so that their benefits can be experienced by the greatest number of clients," said Daniel Berman, Head of European Credit Product Management at JP Morgan in London.
"There is a lot of interest in credit options from a range of accounts. The ability to price them on Bloomberg and get a feeling for their sensitivities is crucial to allow this product to really take off this year," said Marcus Schueler, Head of Credit Derivatives Marketing at Deutsche Bank in London.
"Bloomberg's 'modified Black' CDS Option pricer will allow a broader range of investors to participate in the emerging asset class of credit volatility, and offer a quick, easily- and remotely-accessible way to see volatility movements from one day to the next. Highly recommended," says Alexandre Borione, Head of Credit Volatility, Co-head of Correlation/Hybrids at Standard Bank in London.
"The release of the CDSO page on Bloomberg allows market participants to refer to a standard options pricing tool for index credit options. While participants' models can differ, the existence of CDSO should help establish a bona fide inter-bank index options market. From Credittrade's perspective this is extremely helpful as market participants have indicated to us that they would like to see more liquidity in CDS options, and we would welcome that development," says Patrick Britt, Head of Options Broking at Credittrade in New York.
The Bloomberg CDSO function calculates prices and sensitivities for Options on CDS Indices, such as ITRAXX and CDX, retrievable from the CDSI database. It covers a European-type of exercise, Payer or Receiver positions for the underlying forward CDS contract, no Knock-out features, and customizable strikes. Users can calculate either the fair option premium or the volatility implied in a given price. The contingent leg is a flat curve with the spreads of the underlying Index but it is also customizable for upward or downward sloping CDS curves. The option volatility defaults to the historical volatility of the index over three months based on Bloomberg's contributed data; it is supplied at 40% when data is missing. The output includes several analytics (such as forward start PV01 and ATM forward rate) and sensitivity measures (DV01, Delta, Gamma, Vega).