Definition: An Option with a payoff that depends on credit quality, without bearing ordinary interest-rate risk.
Example: The Option to Exchange private debt for U.S. Treasury debt.
Natural Buyers and Sellers: See Credit Derivatives.
Pricing: Pricing an Option to Exchange () private and Treasury debt would involve a hybrid option model, having characteristics of equity and debt option pricing.
Hedging: One could try to dynamically hedge the delta risks.
Comment: Pricing and hedging might be difficult, and market manipulation may be an issue for a thinly traded underlying instrument.
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