If we do a liquid index trade today both sides of the trade should be equal so that one side can't immediately sell on for a profit; CDSW gives you that, it's about todays value. The whole credit futures thing was a debacle, it took eurex years to bring the product to market. I spoke to them a few weeks before the launch date and the board had yet to agree on a pricing methodology. Today i've seen about 1.7 yards of eur xover trade, eurex havn't traded and there's zero expressed interest

Speaking of the trading of underlying index. In a unfundet form there would be an upfront payments according to the markt value change of the indices. The CDSW screen will give me the value. The question is, if we use the cdsw creen to evaluate the index (swap), it means we treat the index in total as a single name cds regardless their differences. Is that right? If it was right, how could we do this? Are there some reasons surpporting this?

cdsw doesn't tell you the fair spread of the index which is what i thinkyou're after

Then how to calculate the fair spread of the index

stigko: 40% is an assumption, based on historical observations. Realistically, nobody has any clue what a recovery would be on an IG name if it defaults. Things are a bit clearer for HY names, especially those at the deaths door.bzmade1305: Why do people use a single name model for the index? Why not? The index upfront is a discounted expected loss. Since the index is effectively a basket of off-market CDS, the basket has identical cashflows to be discounted on each credit curve. It doesn't matter if you value these as a basket of single name CDS or one one name, the upfront will be the same. It's also utterly impractical to compute 125 single name off-market CDS.To do this properly we would need an entire curve for each name (since these CDS have off-par coupon). Essentially, we will be pricing one of the most liquid and transparent instruments in the marketplace, with 125 questionable curves (ever tried to lift an offer on 1Y CDS in a decent size?). This is also why we're assuming a flat curve when pricing an index - 5Y is liquid. Nobody has a clue where 1Y is.Also, do the world a favor and change a topic of your thesis - those futures are all but dead and there are plenty of questions the market would like to have answered. How about a nice dynamic multi-credit model?

To StrctCred.:if the prof. could do me a favor, I will be happy to change the topic of the thesis. I have to write this thesis to finish my degree and I had no choice to do what I want to do because of the f**king educ. system and especially the rigid rules of the Prof. So I have to live with that.Could you also talk about sth why the credit future failed? Many thx!

then read pedersens paper on index options, that will give you an understanding of the value of the index.

StructCred: Thanks! Also read on moodys recovery rate studies, that corporate bond recoveries exhibit a mean reversion towards long term average of 40%, so I guess it can be justified using 40 % as some kind of standard number.

there is no single rule for choosing the recovery rate...it is the market that determines the recovery rate while trading...on single CDS recovery rate can be negotiated with the bank before you start CDS trading since as a protection seller and premium receiver while obliged to pay the whole amount it is better for you to set a higher recovery rate if you will cash settle in the case of a default..if you choose physical settlement than most banks will choose to give you the cheapest to delivery bond method...so like implied volatilities you can quote your own recovery rate...but there are some market practises...for example in the single CDS that i trade most banks price you with 25% recovery...

It seems there is a bit of confusion about all of this, which is kind of ironic considering the wider context of what has happened to this particular market..... Anyhow, the moody's paper uncovers two things, first, that recovery rates have tended to have a high correlation with GDP growth, i.e. the higher GDP growth in a given year, the higher the recovery rates seem to be. Second, that 40% seems to be the long term mean for recovery rates. There is an active market for recovery rates, where people are literally buying low and selling high.... imagine that. That is a blessing as it creates a tremendous facility for the cash settlement system in place after th 2005 delivery disaster. Finally, to reiterate what many people have been trying to say, the CDSW is old news, no one trades these spreads, and if you do, i've got a bridge for you, it's shiny. There are technical papers out there explaining how the index spread is determined, some of them have been posted on the file share portion of this site.