A credit default swap (CDS) is better regarded as an option-like arrangement.

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A credit default swap is a type of financial derivative that operates like an insurance policy. The buyer of a CDS pays a premium to the seller in exchange for protection against the risk of default on a specific credit instrument (such as a bond or loan). The CDS seller agrees to pay the buyer a fixed amount of money if the credit instrument defaults. This arrangement is option-like because the CDS buyer has the right but not the obligation to trigger the CDS by taking a credit event (i.e. a default) on the reference credit.

A Credit Default Swap (CDS) Is Better Regarded as an Option-Like