Back to basics: the cash CDS basis

We take you back to the credit basics to review everything you thought you already knew but were too afraid to ask... Moorad Choudhry, head of treasury at KBC Financial Products in London, discusses the credit default swap basis

Credit derivatives enable banks and investors to manage the credit risk exposure from their asset portfolios. As the synthetic market is now a reliable indicator of the cash market in credit, it is relevant for market participants to be familiar with the two-way relationship between the two markets. This relationship is represented by the credit default swap (CDS) basis.

Credit default swap basis

A basis exists in all markets where cash and derivatives forms of the same asset trade side-by-side