What are CDX tranches?

What are CDX tranches?

CDS index tranches are synthetic collateralised debt obligations (CDOs) based on a CDS index, where each tranche references a different segment of the loss distribution of the underlying CDS index. 9 The main advantage of index tranches relative to other CDOs is that they are standardised.

What is High Yield CDX?

Markit’s North American High Yield CDX Index, or the CDX. NA. HY Index (the “HY Index”), is composed of one hundred (100) liquid North American entities with high yield credit ratings that trade in the CDS market.

How do CDX trades work?

The CDX index rolls over every six months, and its 125 names enter and leave the index as appropriate. For example, if one of the names is upgraded from below investment grade to investment grade, it will move from the high-yield index to the investment-grade index when the rebalance occurs.

What is a CDX Series?

CDX indices are a family of tradable credit default swap (CDS) indices covering North America and emerging markets. CDX covers multiple sectors, including: CDX North American Investment Grade. CDX North American Investment Grade High Volatility.

Are people buying credit default swaps?

In its most basic terms, a CDS is similar to an insurance contract, providing the buyer with protection against specific risks. Most often, investors buy credit default swaps for protection against a default, but these flexible instruments can be used in many ways to customize exposure to the credit market.

Who benefits from a credit default swap?

The main benefit of credit default swaps is the risk protection they offer to buyers. In entering into a CDS, the buyer – who may be an investor or lender – is transferring risk to the seller. The advantage with this is that the buyer can invest in fixed-income securities that have a higher risk profile.

How do investors make money on credit default swaps?

The company could sell the rights to those payments and the obligations to another buyer and potentially make a profit. Alternatively, imagine an investor who believes that Company A is likely to default on its bonds. The investor can buy a CDS from a bank that will pay out the value of that debt if Company A defaults.

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