iTraxx offers credit default swap index products based on underlying credit default swaps, allowing investors to buy or sell them on the open market. They can be used for coverage or investment purposes. iTraxx offers various index products based on specific industry sector credit default swaps.
iTraxx is a range of credit default swap index products. 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 the non-payment of loans.
The general principle of a credit default swap is that one party pays premiums to the other. The second party then pays an agreed fixed amount if a stated credit arrangement defaults. This deal could, for example, be a bond or a loan.
The most common use of a credit default swap is by lenders. This involves the lending organization entering into a credit default swap on the loan and receiving a payment if the borrower defaults. Indeed insurers lend against the risk of non-payment, but credit default swaps are not usually subject to the same regulation as insurance contracts. It is also possible to enter into a credit default swap without having any involvement in the loan. This is known as a simple credit default swap and is effectively a bet that the borrower will not repay 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 rolled into one product, paid to the holder according to 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 coverage. An example of this would be a company that has a lot of exposure to credit risk, making a lot of loans, subscribing to an iTraxx product so that it gets paid back if defaults overall are higher than it expects. The second reason is simply an investment where investors make or lose money depending on how well they can predict both the likelihood of general defaults and their reading of the market for products.
iTraxx offers three main index products ranging from one based on the riskiest credit default swaps to one based on the most traded credit default swaps. It also offers a variety of index products based on specific industry sector credit default swaps. New index products are created every six months and updated in line with the criteria used for the selection of credit default swaps for each particular product.
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