Options on Debt Derivatives Nearing $100 Billion

Market has nearly doubled in the past year, reflecting anticipation of impending volatility in bond prices.

The market for options on credit derivatives indexes has surged more than 40 percent in the past month to $98.8 billion as investors search farther afield for cheap hedges protecting against a sell-off in the bond markets.

The contracts, which give investors the right but not the obligation to buy or sell indexes of credit-default swaps at a certain price, have doubled from $48.7 billion a year ago, Depository Trust & Clearing Corp. data show. That compares with a 17 percent drop in the amount covered by swaps benchmarks on U.S. and European investment-grade debt and a 4 percent decline for all credit derivative products in the year through June 14.

Default Swaps

The Markit CDX North American Investment Grade Index of swaps jumped to the highest in almost three months after Fed Chairman Ben S. Bernanke said June 19 that policy makers could begin to trim the $85 billion of monthly Treasury and mortgage bond purchases as soon as this year. A rise in the index indicates investors anticipate losses in corporate bonds.

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