Standardised baskets of credit default swaps that trade as a single instrument; CDX covers North America, iTraxx covers Europe and Asia, and both roll every six months.
CDX IG holds 125 investment grade names equally weighted; CDX HY holds 100 high yield names. iTraxx Main and Crossover are the European equivalents. Trading the index is far cheaper and more liquid than trading 125 single-name contracts.
Indices are the standard macro hedge for credit portfolios and the standard way to express a view on the credit cycle. The gap between the index level and the weighted average of its constituents is the index skew, which relative value desks arbitrage.
Example: a manager holds $200 million of IG bonds with spread-duration 6.8 and buys $200 million of CDX IG protection with duration 4.7. To match spread exposure they need $200m x 6.8 / 4.7 = $289 million of index notional.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
Educational only, not advice. Spotted an error? Post in Site Feedback.