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What a Credit Default Swap Spread Measures

Article Quant Q&A · Author: Almacomet
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Summary

The note clarifies that a credit default swap (CDS) spread and a bid–ask spread use the word “spread” for different concepts. A CDS spread is described as the cost of credit protection and, in the answer, as the difference between a credit-risky interest rate and a risk-free rate. A bid–ask spread refers to the difference between the prices at which a market participant can buy and sell an instrument.

The answer is brief and addresses terminology rather than CDS valuation, trading, or market quoting conventions. It offers no numerical example or supporting analysis, so it serves mainly as a basic distinction: the two uses of “spread” are not related merely because they share a name. Readers seeking details about how CDS premiums are quoted or priced would need a fuller source.

Key ideas

  • A CDS spread represents the cost of credit protection.
  • In this context, the CDS spread reflects the difference between a credit-risky rate and a risk-free rate.
  • A bid–ask spread is the difference between quoted buying and selling prices.
  • The shared term does not imply that CDS spreads and bid–ask spreads are related.

Tags

Fixed incomeDerivatives pricing
Full text
# Is a CDS spread a spread in a typical sense


# Is a CDS spread a spread in a typical sense












I have a basic question that's causing me some confusion. I see discussion of a "CDS spread," defined as the cost of protection. Are these the same as a bid-ask spread? Is there any relation between the two, if not? Thanks.

## Answer by CFW (score 4, accepted)

https://quant.stackexchange.com/a/31317

Regarding the terminology, there is no relation between CDS spread and bid/ask spread. The term spread in this sense refers to the related difference (spread) of the effective (credit risky) interest rate and the "risk free" rate (also see "credit spread").

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.