ABSTRACT
We introduce defaultable floating-rate notes (DFRNs). We point out which kind of CDS payoff produces a forward CDS rate that is equal to the fair spread in the considered DFRN. An approximated equivalence between CDSs and DFRNs is established, which allows to view CDS options as structurally similar to the optional component in defaultable callable notes. Equivalence of CDS and DFRNs has been known for a while in the market (Schönbucher 1998), where the simpler case with continuous flows of payments is considered. Here we consider a discrete set of flows, as in real market contracts, and find that the equivalence holds only after postponing or anticipating some relevant default indicators or discount factors.
