Basket Default Swaps

Abstract Basket credit derivatives are financial instruments whose payout depends on the credit behavior of a small number of credits. In this sense, they are between single‐name credit default swaps (CDS) and collateralized debt obligations (CDO)‐like structures. The standard products are n th‐to‐default basket in which the contingent payment is made when the n th default in a basket of at least n credits happens. Among these, first‐ or second‐to‐default swaps (FtD and StD) on a portfolio of three to five credits are most popular. As for CDOs, the benchmark valuation models are based on a copula for default times. However, some approaches based on spread models have also been developed.