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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. Unlike a credit default swap, which is an over the counter credit derivative, a credit default swap index is a completely standardized credit security and may therefore be more liquid and trade at a smaller bid–offer spread.
Credit default swaps in their current form have existed since the early 1990s and increased in use in the early 2000s. By the end of 2007, the outstanding CDS amount was $62.2 trillion, [3] falling to $26.3 trillion by mid-year 2010 [4] and reportedly $25.5 [5] trillion in early 2012.
Because the marketplace recognizes such events as related to one's credit worthiness, credit events can trigger specific protections provided by credit derivatives (e.g. credit default swap, credit default swap index, credit default swap index tranche). [1] A credit event triggers a swap where oftentimes the borrower has to terminate the ...
Markit Group Limited marketed the ABX index and by 2007 had acquired (CDS IndexCo). On 17 The ABX index was a credit default swap of asset-backed mortgages of 30 of the most liquid mortgage-backed bonds. Hedge funds began shorting that ABX index in early 2006 at par. The Deutsche Bank, alone, reportedly made $250 million.
Credit default swap indices allow an investor to transfer credit risk in a more efficient manner than using groups of single credit default swaps. They are standardised contracts and reference a fixed number of obligors with shared characteristics. Investors can be long or short the index which is equivalent to being protection buyers or sellers.
The option is usually European, exercisable only at one date in the future at a specific strike price defined as a coupon on the credit default swap. Credit default options on single credits are extinguished upon default without any cashflows, other than the upfront premium paid by the buyer of the option. Therefore, buying a payer option is ...
A constant maturity credit default swap (CMCDS) is a type of credit derivative product, similar to a standard credit default swap (CDS). [1] Addressing CMCDS typically requires prior understanding of credit default swaps .
A synthetic CDO is a variation of a CDO (collateralized debt obligation) that generally uses credit default swaps and other derivatives to obtain its investment goals. [1] As such, it is a complex derivative financial security sometimes described as a bet on the performance of other mortgage (or other) products, rather than a real mortgage security. [2]