Keeping your options open

The burgeoning popularity of credit default swaps has sparked much talk about the development of a market in credit options. Ian Clague asks whether 2003 will see the birth of this market and investigates the opportunities arising from credit options and the barriers to their growth

Options usually represent a major part of any derivative market. They are, in a sense, the perfect hedge, providing protection when the market moves against a portfolio and conveniently becoming irrelevant when market moves are favourable. In many ways options are like insurance to an investor: they can buy an asset but also buy the opportunity to sell it later at a certain price if the investment goes wrong.

In the derivative markets of equity and interest rate swaps, options represent a