iTraxx offers credit default swap products, based on underlying credit default swaps, which are used as insurance against loan defaults. The products are used as a form of cover or investment, and iTraxx offers a range of index products based on specific industry sectors.
iTraxx is a range of default credit exchange rate products. It covers most major markets except North America, which is primarily covered by a different set of products under the CDX name. The products are based on underlying credit default swaps, which are effectively an insurance contract that covers loan defaults.
The general principle of a credit default swap is that one party pays the premiums to the other. The second party pays an agreed fixed amount if an established credit agreement defaults. This arrangement could, for example, be a bond or loan.
The most common use of a credit default swap is by lenders. This involves the organization making the loan obtaining a credit default swap on the loan and receiving a payment if the borrower defaults. In effect, insurers lend against the risk of default, but credit default swaps are generally not subject to the same regulation as insurance contracts. It is also possible to take out a credit default swap without having any interest in the loan. This is known as a simple credit default swap and is effectively a bet that the borrower will default on the loan.
A credit default swap index such as those offered by iTraxx is a financial product based on credit default swaps. In effect, it is a collection of multiple credit default swaps bundled together as a single product, which are paid to the holder depending on the number of defaults. The difference is that the holder can buy or sell the product on the open market like any other security.
There are two main reasons investors use iTraxx products. Some will use them as a form of cover. An example of this would be a company that has a large exposure to credit risk, making a lot of loans, putting out an iTraxx product so that it recovers some money if defaults are generally higher than expected. The second reason is simply as an investment where investors make or lose money depending on how well they can predict both the probability of general defaults and their market read of the products.
iTraxx offers three main index products ranging from one based on the riskiest credit default swaps to one based on the most widely traded credit default swaps. It also offers a variety of index products based on credit default swaps of specific industry sectors. New index products are created every six months, updated in accordance with the criteria used to select the default credit swaps for each particular product.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
