Credit Indices

A credit default swap index is a credit derivative used to hedge credit risk or to take a position on a basket of credit entities.
Unlike a credit default swap, which is an over the counter credit derivative, a credit default swap index is completely standardised credit security and may therefore be more liquid and trade at a smaller bid-offer spread (very narrow at 1-2 basis points)
This means that it can be cheaper to hedge a portfolio of credit default swaps or bonds with a CDS index than it would be to buy many CDS to achieve a similar effect.
Credit-default swap indexes are benchmarks for protecting investors owning bonds against default, and traders use them to speculate on changes in credit quality.
These indices enable market participants to trade funded (and unfunded) crredit derivatives linked to a credit benchmark.

There are currently two main families of CDS indices: CDX and iTraxx

A new series of CDS indices is issued every six months by Markit and IIC
These portoflios are updated on March 20 and Sepetember 20
On the day of issue a fixed coupon is decided for the whole index based on the credit spread of the entities in the index. Once this has been decided the index constituents and the fixed coupon are published, and the indices can be actively traded.

Markit CDX Index

This index is managed by CDS Index Company and marketed by Markit.
CDX - 125 Investment grade bonds from North America and Emerging Market companies
This index represent the average of the CDS spreads on the companies in the portfolio

Markit ITRAXX Index

This index is managed by the International Index Company (IIC)
The Markit Itraxx index comprises of the most liquid names in the European and Asian markets
There are a number of different indexes covering different sectors (eg Itraxx Europe, Itraxx japan)
Itraxx - 125 investment grade bonds from Europe and Asia
This index represent the average of the CDS spreads on the companies in the portfolio

How we price them

The desk get the broker quotes
The desk them send these quotes to operations
Operations then give this price to finance (via non markit end of day prices) who convert it to a spread
Finance convert the traded cash price into a CDS spread (bhps)

Implied Hazard Rate ??