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.

Every key term, A to Z

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.