Super Derivatives

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CDS index

A credit default swap index is a credit derivative used to hedge credit risk or to take a position on a basket of credit entities or indices (a CDS index is a portfolio of actively traded liquid names in a particular sector of the market).

Unlike a credit default swap, which is an OTC (over the counter) credit derivative, a credit default swap index is standardized. This means that it is therefore highly liquid and trades at a very small bid-offer spread. This makes it is a primary market vehicle for gaining diversified credit exposure.

There are two main families of index:

    CDX
    CDX indices contain North American and Emerging Market companies and are administered by CDS Index Company (CDSIndexCo) and marketed by Markit Group.
    iTraxx
    iTraxx indeices contain companies from the rest of the world and are managed by the International Index Company (IIC).


For more information on these indices see http://www.indexco.com.
A new series of CDS indices are issued every six months by Markit and IIC (although previously issued series continue to be traded until their expiry date). Running up to the announcement of each series a group of investment banks is polled to determine the credit entities that will form the constituents of the new issue. On the day of issue a fixed coupon is decided for the whole index based on the credit spread of the entities in the index. Once this has been decided the index constituents and the fixed coupon are published, and the indices can be actively traded. They are traded according to set rules, which cannot be altered. For example, each series has its own set of expiry dates.

In SD-CD when you price up a CDS index, after you select one of the pre-defined expiry dates, the system automatically enters the market spread. This indicates where the index is currently traded on the market. In addition, in the CDS Spread Curve for the current instrument (accessed via the left-hand menu) you can also see the:

    Recovery rate
    Expected loss for this instrument


This indicates how much of the portfolio can be expected to be lost over the lifetime of the index.
These rates are then used to price the CDS index.

Note In the results area in SD-CM, the calculated price does not equal the present value as the present value does not include the accrued interest.

http://www.sdgm.com/Support/Glossary.as ... DS%20index