Dow Jones CDX

Definition

The Credit Default Swap Index (CDX), formerly known as the Dow Jones CDX, is a benchmark financial instrument composed of credit default swap contracts (CDS) issued by North American or emerging market companies. CDX is a tool used to measure the credit risk of a basket of corporate debts.

Origin

The CDX index was established in the early 20th century as the first CDS index. Its creation marked a significant development in the credit derivatives market, providing a standardized way to trade and hedge credit risk.

Categories and Features

The CDX index can be divided into different series and categories, typically classified based on the credit rating and geographical location of the issuing companies. The main categories include investment-grade and high-yield. Investment-grade CDX usually includes companies with higher credit ratings, while high-yield CDX includes companies with lower credit ratings. The main features of CDX are its standardization and liquidity, making it an effective tool for investors to hedge credit risk.

Case Studies

During the 2008 financial crisis, the CDX index was widely used to hedge credit risk. For example, some investors purchased CDX index contracts to protect their portfolios from corporate debt defaults. Additionally, during the COVID-19 pandemic in 2020, the volatility of the CDX index increased, reflecting market concerns about corporate credit risk.

Common Issues

Investors using CDX may encounter issues such as insufficient market liquidity and inaccurate credit risk assessment. Furthermore, the complexity of CDX can lead to misunderstandings, especially for investors unfamiliar with credit derivatives.