12.2 cds indices

Copyright © 2018 CapitaLogic Limited
Chapter 12
Credit Indices
This presentation file is prepared in accordance with
Chapter 12 of the text book
“Managing Credit Risk Under The Basel III Framework, 3rd ed”
Website : https://sites.google.com/site/crmbasel
E-mail : crmbasel@gmail.com

Copyright © 2018 CapitaLogic Limited 2
Declaration
 Copyright © 2018 CapitaLogic Limited.
 All rights reserved. No part of this presentation file may be
reproduced, in any form or by any means, without written
permission from CapitaLogic Limited.
 Authored by Dr. LAM Yat-fai (林日辉),
Director, CapitaLogic Limited,
Adjunct Professor of Finance, City University of Hong Kong,
Doctor of Business Administration,
CFA, CAIA, CAMS, FRM, PRM.

Outline
 CDS indice
 CDS index contract

CDS index
 The arithmetic average of the CDS spreads of a group of
liquidly traded and standardized single name CDSs (from 3 to
125)
 Originated on specific days in March and September
 After the origination day, the CDS spreads are calculated by
setting the value of the component single name CDSs to zero
 A metric to represent the systematic credit quality of a
specific market segment
N
k
k=1
CDS spread
CDS index =
N


CDS index
 Operated and published by Mark-it
 CDX family of indices for North America and
emerging markets
 iTraxx family of indices for Europe and Asia
http://www.markit.com/markit.jsp?jsppage=in
dices.jsp

Classification
 Geographic area
 CDX index
 North America
 Emerging market
 iTraxx
 Europe
 Asia
 Type of debt issuers
 Corporation
 Government
 Credit quality
 Investment grade
 High yield grade
 Crossover
 Standard tenor
 1, 2, 3, 5, 7, 10 years

CDX indices
Region Credit quality/theme No. of CDS s Index
North
America
Investment grade 125 CDX.NA.IG
Investment grade and high volatility 30 CDX.NA.IG.HVOL
High yield grade 100 CDX.NA.HY
BB 37 CDX.NA.HY.BB
B 46 CDX.NA.HY.B
Crossover 35 CDX.NA.XO
First lien leveraged loans 100 LCDX
Emerging
markets
14 CDX.EM
Diversified 40 CDX.EM Diversified

iTraxx indices (1)
Region Theme No. of CDSs Index
Europe 125 iTraxx Europe
High volatility 30 iTraxx Europe HiVol
Crossover 75 iTraxx Europe Crossover
First lien loan 40 iTraxx LEVX
Non-financial 100 iTraxx Non-Financials
Senior subordination financial 25 iTraxx Financials Senior
Junior subordination financial 25 iTraxx Financials Sub
Telecommunications, media
and technology
20 iTraxx TMT
Industrial 20 iTraxx Industrials
Energy industry 20 iTraxx Energy
Manufacturers of consumer products 30 iTraxx Consumers
Automobile industry 10 iTraxx Autos

iTraxx indices (2)
Region Theme No. of CDSs Index
Asia
Ex-Japan investment grade 50 iTraxx Asia
Ex-Japan high yield 20 iTraxx Asia HY
Japan 50 iTraxx Japan
Australia 25 iTraxx Australia
Country
West Europe 15 iTraxx SOVX West Europe
Central/East Europe, Middle East
and Africa
15 iTraxx SOVX CEEMEA
Asia Pacific 10 iTraxx SOVX Asia Pacific
Latin America 8 iTraxx SOVX Latin America
Global liquid investment grade iTraxx SOVX IG
G7 iTraxx SOVX G7
Brazil, Russia, India, China iTraxx SOVX BRIC
Example 12.1

CDS index series
 On-the-run series
 Standard tenor + 3 months to standard tenor - 3 months
 New series once every six months in March and
September
 New group of component single name CDSs proposed by
CDS traders
 Off-the-run series
 Protection period < Standard tenor - 3 months
 Very low market attention

Survival revision to CDS index
 Initial CDS index
 Revised CDS index
Initial no. of reference debts
k
k=1
No. of survival debts
k
k=1
CDS spread
CDS spread
No. of survival reference debts



Not a consistent tool
for monitoring of credit market
 Default effect
 CDS index
 increases sharply before the default of a reference debt
 decreases sharply after the default of a reference debt
 Discontinuity
 Abrupt jump on the effective day of a new on-
the-run series
 Selection bias
 Understate the trend of deterioration or
improvement

Outline
 CDS index
 CDS index contract

CDS index contract
 A portfolio of single name CDSs
 Reference debts = Components in a CDS
index
 CDS principal = Contractual principal / N
 Standardized premium rate
 100 bps per quarter for investment grade index
 500 bps per quarter for high yield grade index
 Contract value = Sum of CDS values

Functional purpose
 Most liquidly traded credit instrument
 Trading on the systematic credit quality
 Low value when systematic credit quality is high
 High value when systematic credit quality is low
 Long a CDS index contract when an investor expects
the systematic credit quality to deteriorate
 Short a CDS index contract when an investor
expects the systematic credit quality to improve

Upfront payments
 Upfront fee
 Protection buyer to protection seller when
the present value of expected protection is
higher than that of expected premiums
 Protection seller to protection buyer when
the present value of expected protection is
lower than that of expected premiums

Premiums
 Standard premium
 Quarterly
 Accrued premium
 Accrued premium of the defaulted reference debt
 Reduced premium
 Standard premium
Number of survival reference debts
×

Cash settlement
 Upon default of a reference debt
Contractual principal
× LGD of defaulted debt
Payoff =
Initial number of reference debts

Valuation
Category Factor Impact to value
(long position)
Variation after
origination
Impact to
credit risk
(short position)
Reference
debt
Contractual principal + No +
LGD + Moderate +
PD + Material +
Protection period +
Decreasing
gradually
+
Portfolio
Concentration of
debts
+
Default dependency +
CDS index Premium rate - No

Credit risk
 Long position
 No credit risk
 Short position
 XCL as a valid credit risk measure for a CDS
index contract with sufficiently large no. of
reference debts (e.g. > 30)

12.2 cds indices

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to 12.2 cds indices

Similar to 12.2 cds indices (20)

More from crmbasel

More from crmbasel (15)

Recently uploaded

Recently uploaded (20)

12.2 cds indices