Also call CDS. A CDS option that grants the holder the right to buy credit protection on a specific reference entity during a predetermined future period starting at some date earlier against a preset premium. For example, firm (x) might buy a call CDS on firm (y) for four years starting in one year for 250 basis points per annum. If firm (y) defaults during the option’s life (1 year), the option expires worthless. Otherwise, firm (x) will exercise the option in case the market price of four-year protection is more than 250 basis points at expiration.

2) a hedging tool that combines a number of interest rate call options. By a cap, a borrower with a floating rate loan can hedge against interest rate increases.