CDS stands for Credit Default Swap. This is a standardized product and one of the most common ways to hedge credit risk or take a position on a basket of credit entities. Traders especially love them because of the exceptional liquidity and tight bid-ask spreads. The most commonly known contracts are the iTraxx Europe (European Investment Grade basket), iTraxx Crossover (European High Yield basket), CDX Investment Grade (US Investment Grade basket) and CDX High Yield (US High Yield basket).
When traders are buying any of the contracts what they try to achieve is to hedge their exposure. The higher the price of a CDS index, the higher the cost of insurance/hedging is, hence contributing to elevated levels of fear in the system. When CDS prices are low the cost of insurance/hedging is low, directly resulting in lack of fear in the system.
My personal use of the CDS indices is to gauge how much fear there is in each corresponding market. Outlining the key levels pinpoints potential stress triggers which can serve as risk on/risk off mode in the credit markets. iTraxx Europe, iTraxx Crossover, CDX IG and CDX HY are widely followed by credit traders.
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What exactly is a CDS Index?
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CDS stands for Credit Default Swap. This is a standardized product and one of the most common ways to hedge credit risk or take a position on a basket of credit entities. Traders especially love them because of the exceptional liquidity and tight bid-ask spreads. The most commonly known contracts are the iTraxx Europe (European Investment Grade basket), iTraxx Crossover (European High Yield basket), CDX Investment Grade (US Investment Grade basket) and CDX High Yield (US High Yield basket).
When traders are buying any of the contracts what they try to achieve is to hedge their exposure. The higher the price of a CDS index, the higher the cost of insurance/hedging is, hence contributing to elevated levels of fear in the system. When CDS prices are low the cost of insurance/hedging is low, directly resulting in lack of fear in the system.
My personal use of the CDS indices is to gauge how much fear there is in each corresponding market. Outlining the key levels pinpoints potential stress triggers which can serve as risk on/risk off mode in the credit markets. iTraxx Europe, iTraxx Crossover, CDX IG and CDX HY are widely followed by credit traders.