Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition

Single-name credit default swaps vs. CDS index vs. benchmark CDS index

So far, we have discussed the credit risk arising from a single exposure to corporate ABC. We were dealing with single-name credit default swaps. However, banks might wish to directly buy credit risk insurance on a portfolio of corporate clients. These are called CDS index or basket CDS, meaning that the credit insurance concerns several corporate clients included in the index. Moreover, to increase the liquidity of the market, some benchmark CDS indices have been created. Well-known benchmarks include DJ CDX for North America and emerging markets, and DJ iTraxx for Europe and Asia.

Key Points A credit derivative contract is equivalent to credit insurance. One party pays ...