CREDIT DEFAULT SWAPS INDEXES

Predefined single-name CDS contracts are also grouped by broad market segments. The three most common are CDS for high-grade corporate bonds (index denoted by CDX.IG), high-yield corporate bonds (index denoted by CDX.HY), and loans (index denoted by LCDX), and help market participants with a number of requirements. The core buyers and sellers of CDX indexes have been index arbitrager players, correlation desks, bank portfolios and proprietary trading desks, and credit hedge funds. Increasingly, greater participation by equity and macro hedge funds has been observed. They are looking for the following from CDX indexes.
Barometer of market sentiment. Credit indexes are averages of a universe of single-name CDS contracts, and provide a snapshot of the market’s risk appetite in the same way that the S&P 500 equity index provides a snapshot of equity markets. Note that although there are many similarities between the CDX indexes and equity indexes, some major differences still exist as highlighted in Exhibit 23.4.
Hedging tool. Because of the relatively large trading volume and favorable liquidity provided by both the CDX.HY and LCDX indexes, a number of investors use the products to tactically alter portfolio exposures.
Arbitrage and relative value positioning. One of the more challenging endeavors that many long/short investors face is funding short positions; Companies A, B, and C may be high beta and face more fundamental pressures than the ...

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