Credit · Core
Credit Default Swap
A CDS is a bilateral contract that pays the loss on a reference credit after a credit event — default insurance quoted as a spread.
Definition
Buyer pays a running spread (and maybe upfront); seller pays par minus recovery on a credit event (ISDA definitions). Indices (CDX, iTraxx) are baskets. Basis to cash is a trade.
Why it matters
It is the cleanest single-name credit short and the standard hedge. Documentation and cheapest-to-deliver are the fine print.
Case
A name’s bond cheapens on a rumor; CDS widens less. Basis traders step in. The event, if it comes, is an auction, not a feeling.
How to read it
Doc clause, restructuring type, and recovery assumption in the quote. Then cash-CDS basis.
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