CS01 and Jump to Default

Spread risk and default risk are not the same number

CS01 is the change in value for a one basis point move in credit spread — the credit market’s answer to DV01. Jump-to-default is what the position loses or gains if the name defaults tomorrow, with no widening in between. A credit book has to report both, because a position can be small in one and enormous in the other, and it is the second that ends careers.

Open in the app · Risk & the Greeks · intermediate

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What the lesson covers

1. What CS01 is
2. What jump to default is
3. Why both are reported
4. Curves and correlation
5. Risks to watch

Key terms

• CS01 — The change in value for a one basis point widening in the credit spread.
• Risky annuity — The discounted, survival-weighted premium stream that scales a CDS position’s spread sensitivity.
• Jump to default — The immediate profit or loss if the reference entity defaults now, rather than widens.
• Recovery rate — The assumed proportion of face value a defaulted claim is worth, fixed in the market by auction.
• Index basis — The difference between an index and the sum of its constituents, which is what an index hedge leaves behind.
• Correlation risk — Exposure to how likely defaults are to arrive together, carried by index tranche positions.

In practice

Credit desks report CS01 by name and by curve bucket, and JTD by name, with limits on each. The pairing is also written into capital rules: the standardised market risk framework charges default risk separately from spread risk for exactly the reason this lesson gives.

Read next

• Credit Default Swap — Insurance against a borrower defaulting
• CDX Index — A basket of CDS in one tradable index
• DV01 and Rate Risk — What one basis point is worth

In the app, CS01 and Jump to Default carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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Educational content only. Nothing here is financial advice, an offer to trade, or a recommendation to buy or sell any instrument.