The Credit Default Swap Basis

CHAPTER 3

The CDS Basis I: The Relationship Between Cash and Synthetic Credit Markets

Anyone composing a history of banking would observe that the use of interest-rate derivatives increased liquidity in the world's financial markets. Such instruments made it easier for users and providers of capital to price and hedge cash market debt capital products. Interest-rate swaps are now a leading indicator of the financial markets and a tool by which cash market efficiency is maintained. We can observe a similar happening in credit markets. Credit derivatives were introduced around 1994–1995, although liquid markets did not develop until a few years after that. They are now an important part of the global capital markets, and have contributed to increased ...