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 Hence the titular “cheapest to deliver”: where a range of deliverable obligations are specified, the calculation agent — usually the Buyer — gas discretion as to which she will choose. ''She will choose the cheapest''
+Whereupon a famous illustration arose. As the noughties wore on, CDS practitioners got more used to the idea that the CDS was a one-to-one cresit hedge for their positions, and whether by habit or for balancesheet reasons,because that is where all the liquidity was, or maybe just because CDS was hip, started to hedge liquid instruments —the kind for which you '' could buy a put — with CDS as well.
-====Trades are zero-sum games====
+Being a “crash protection”<ref>I did ''not'' say “[[Potts opinion|insurance]]”.</ref> product, almost all CDS expired unexercised, so the embedded cheapest to deliver option wasnʼt obvious to credit protection sellers — typically buy side investors looking for yield enhancement. It ''was'' obvious to sell side CDS buyers, who made their P&L precisely by pricing protection they paid by reference to the “{{cddprov|Reference Obligation}}” but delta-hedging by reference to the cheapest to deliver of the “{{cddprov|Delivery Obligation}}s”. This mispricing became apparent when a torrent of {{cddprov|Credit Events}} thundered through the market, Sellers affected outrage when Buyers  referenced not the freshly-issued, publicly quoted, liquid senior bonds they expected, but rather obscure, deeply subordinated, perpetual notes that hadn’t traded since issue, in 1975, that they¹d never heard of, and which barely scraped into eligibility as {{cddprov|Deliverable Obligation}}s by some oversight in the drafting on the Confirmation.
-Where a contract can be fully understood in monetary terms, expect the parties to do the utter bare minimum to discharge it.
-These are “transactions”; [[Zero-sum game|zero-sum]], [[Finite and Infinite Games|finite games]] — neither side has any expectation beyond the competent performance of its literal terms. When that is done, all remaining expectations fall to zero. The parties can walk away and never meet again.
+Cue much litigation, but the real lesson: read trade documents with peril-sensitive sunglasses. (The other lesson is that [[credit derivative]]s are silly things, but that is a story for another day.)
-Transactions, so regarded, are “trades”: quid-pro-quo, “[[barter]]” exchanges between parties who may or may not, otherwise, even like each other. The equity of the bargain is completely contained in the exchange: once it is done no abiding trust or faithfulness remains or is expected.
+The credit derivatives market is a shadow of its former self.
-====Cheapest-to-deliver====
+====Trades are zero-sum games====
-We should not, therefore,  be surprised if the person to whom we sold an [[Option|financial option]] exercises it to her own advantage. That is why she bought it.  ''That was the deal''. So we draw our trade documentation to be clear and to ''avoid'' giving away unintended options.
+So where a contract can be fully understood in monetary terms, expect the parties to do the utter bare minimum to discharge it.  Look out, in other words, for “cheapest to deliver” options.
-A famous example arose in the CDS market during the financial crisis. Credit derivatives designate a specific {{cddprov|Reference Obligation}} that triggers a {{cddprov|Credit Event}}, but a wider class of {{cddprov|Deliverable Obligation}}s that the {{cddprov|Buyer}} may use to value its credit loss should one happen. This gave Buyers a “cheapest-to-deliver” option and, when the world was in flames and everyone’s hair was on fire they exercised it, selecting the cheapest {{cddprov|Deliverable Obligation}}s they could find.
+These contracts are “transactions”; [[Zero-sum game|zero-sum]], [[Finite and Infinite Games|finite games]] — neither side has any expectation beyond the competent performance of its literal terms. When that is done, all remaining expectations fall to zero. The parties can walk away and never meet again.
-This should not have, but ''did'', surprise credit derivative ''Sellers''. When a torrent of {{cddprov|Credit Events}} thundered through the market, Sellers affected outraged when Buyers  referenced not the freshly-issued, publicly quoted, liquid senior bonds they expected, but rather obscure, deeply subordinated, perpetual notes that hadn’t traded since issue, in 1975, that they¹d never heard of, and which barely scraped into eligibility as {{cddprov|Deliverable Obligation}}s by some oversight in the drafting on the Confirmation.
+Recall the distinction [[David Graeber]] makes between ''[[barter]]'' and ''[[credit]]''. Barter is an interaction between hostiles who cannot afford to leave anything on the table; credit is an interaction between friends who can and ''should''.
-Cue much litigation, but the real lesson: read trade documents with peril-sensitive sunglasses. (The other lesson is that [[credit derivative]]s are silly things, but that is a story for another day.)
+Transactions, so regarded, are “trades”: quid-pro-quo, “[[barter]]” exchanges between parties who may or may not, otherwise, even like each other. The equity of the bargain is completely contained in the exchange: once performed, no abiding trust or faithfulness remains or is expected.
+When we are trading, we should not be surprised when our counterparty exercises a cheapest to deliver option. (in the market a delta-hedged dealer does not ''have'' a market position, so will not care how its customer exercises her options.)
-====Relationship contracts are not zero-sum games====
+But discrete trades are an unusual type of contract. Most commercial arrangements depend on trust. They operate the same way social relationships do, with ongoing, permanently undischarged “social debts” between the parties. These are the ties that bind, which make credit extension feasible. Those in an ongoing commercial relationship do not, if they know what is good for them, exercise cheapest to deliver options. work-to-rule; if there are errors or misunderstandings we are, within reason, forgiving of them. We allow each other flex: as long as we are making a return from the relationship we are happy to leave something on the table in the interests of the longer-term relationship.
-But discrete trades are an unusual type of contract. Most commercial relationships (even trading ones) are based on trust. They operate the same way social relationships do, with ongoing, permanently undischarged “social debts” between the parties. These are the ties that bind, in which credit is possible. We do not work-to-rule; if there are errors or misunderstandings we are, within reason, forgiving of them. We allow each other flex: as long as we are making a return from the relationship we are happy to leave something on the table in the interests of the longer-term relationship.
 ====CDOs and cheapest-to-deliver====