What is the basis of an index CDS?

An index Credit Default Swap (CDS) is fundamentally designed to reflect the movement of a credit index, which typically comprises a portfolio of various credit instruments, such as corporate bonds. This type of instrument allows investors to manage or speculate on the credit risk associated with the overall market or specific sectors rather than just individual entities.

The credit index itself aggregates credit risk from multiple issuers, and the value of the index CDS moves in relation to the perceived credit risk and creditworthiness of the underlying entities in that index. As defaults occur, or as the market's perception of credit risk changes, the pricing of the index CDS will also fluctuate, effectively mirroring those shifts in credit conditions.

In contrast to the other options, this characteristic of reflecting a broad market signal differentiates the index CDS from instruments tied to government bond yields, specific assets like equities, or those that apply exclusively to high-risk securities. Each of those options targets different financial measures or asset classes, whereas the index CDS is specifically designed around the dynamics of credit risk within a specified group of obligations.