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 a completely standardised credit security and may therefore be more
liquid and trade at a smaller
bid-offer spread. 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 single name 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.