An option on credit which gives the holder the right to enter into a credit default swap at a given expiration date, at no cost, provided that no default event would happen before expiration. However, the option holder will have to pay a premium rate called the strike, made in a single upfront payment. In case the underlying credit does default, the option knocks out and becomes nullified or worthless. The credit default swaption provides protection against changes in credit curve. In other words, it allows an investor to buy protection on a reference name at a set spread. An option to obtain (buy) credit protection is known as a payer swaption and a swaption to provide (sell) credit protection is called a receiver swaption.
This swaption is also referred to as a credit swaption or a CDS option.
