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Derivatives

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  • August 2, 2022
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Fair Spread

In relation to credit derivatives (credit default swaps, CDSs, and other similar products), it is the average of the single-name CDS spreads (CDS spread for a single name) for all the constituent names in the CDS index, weighted by probability of default (PD).

The fair spread is the starting point for calculating the market spread (real spread/ intrinsic spread). The fair spread has to be adjusted using a flat credit curve.

It is also known as the theoretical spread.

In a different context, with respect to futures contracts, it may refer to the fair value spread– i.e., the difference between the fair value (FV) and the current market price of a future contract.


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