Value the option as a factor of the CDS spread on company C multiplied by the loan amount.
For example; the 5yrs CDS on company C is 220bps, the loan amount is £100. Therefore, to insure the bankruptcy of company C, a lender will have pay £2.20 per annum. If there is a default, the CDS seller has to pay the company A £100.
This doesn’t take into account recovery value etc i.e. what is the loss on the loan in bankruptcy?
You could say that recovery is £10, therefore you’re only willing to pay 220bps on the £90 - therefore you’re willing to £1.98pa.
Hi, thanks a lot for sharing your ideas. It is really helpful.
I think the same way. Considering, the company C is not tradable and there is no CDS on C, I assume to identify the company C credit rating, then to find CDS on similar companies and calculate ranges for such CDS spreads.