The Credit Default Swap Basis

CHAPTER 1

A Primer on Credit Default Swaps

The basis is an important measure of relative value in credit markets. Prior to the development and introduction of credit derivatives, there was no concept of a credit basis, because there was no way to trade credit explicitly as an asset class in its own right. Credit derivatives enable such trading, and the emergence of a liquid market in credit derivatives has enabled investors to trade the basis across cash and synthetic (derivative) markets.

Traditionally we would define the basis as the difference between the spot price of a deliverable asset and the relative price of the shortest-duration futures contract written on the same asset. While theory would dictate that, funding or “carry” costs excepted, ...