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I'm just getting into Credit derivatives at the moment but I'm having a bit of trouble with the technicalities of CDS Indices(CDX etc.)

My question is. Given that CDS indices have fixed lifetime, is it the case that (i) All contracts entered into have the same time to maturity as the index e.g 5 years or rather (ii) Whenever the contract is entered into e.g buying X notional protection on the index, then the time to maturity of the contract is the time remaining on the index lifetime. For example, if the index for 5yr CDS launched last year then any contracts entered into now will have a time to maturity of 4 years.

Apologies if this is a basic question!

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  • $\begingroup$ The 'Credit Derivatives' chapter of The Handbook of Fixed Income Securities by Frank J. Fabozzi and Steven V. Mann is a great reference for CDS specifics. $\endgroup$ – Forrest Dec 27 '17 at 6:33
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It is the latter. There is a roll down. The indices comprise default swaps that have a 5Yr tenor on index creation date.

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Every 6 months, there is a new series of an index (usually with slightly different names). The "on the run" series (maturing on IMM date 5 years from now) is the most liquid. "Off the run" series (maturing on IMM dates 4.5, 4, 3.5, etc years from now) are much less liquid with wider bid-ask spread than on-the-run one.

In 2012 Bruno Iksil (aka London Whale) lost lots of money for JPMorgan trading off-the-run series of IG index. A detailed discussion of what he did and how indices work can be found here https://files.shareholder.com/downloads/ONE/2272984969x0x628656/4cb574a0-0bf5-4728-9582-625e4519b5ab/Task_Force_Report.pdf . I found it very educational.

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  • $\begingroup$ It seems like your linked reference to the discussion is not available. $\endgroup$ – skoestlmeier Jan 20 at 15:50
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    $\begingroup$ I'm so sorry, the link worked when I posted it, but right now the entire site seems to be down. The paper has a very nice explanation of the relationships between off the off the run and on the run index prices that Iksil was trying to exploit, the VaR, etc that I hoped would help the asker. I saved a copy, but to repost it would probably break rules. $\endgroup$ – Dimitri Vulis Jan 20 at 16:04

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