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(CDX) contract provides protection to the protection buyer against the credit risk of a standardized basket of reference entities called names. If a credit event occurs the swap premium payment ceases in the case of a single-name CDS. On the other hand for a CDX the protection buyer continues to pay swap premium payments based on a reduced notional amount because less reference names are being protected. 1 There are two famous CDXs: the Dow Jones CDX and the International Index Company iTraxx. Dow Jones CDX reference 125 investment grade names in North America and emerging markets while the iTraxx includes 125 investment grade reference names in Europe and Asia markets. Both indexes are standardized in terms of the index composition procedure premium payment and maturity. The Dow Jones CDX NA IG index and the iTraxx Europe index are the mostly traded index. CDXs contracts with 3 5 7 and 10-year maturities are available. The composition of names in a CDX basket are reviewed every six mo...

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This term paper focus on stepwise procedure of tranching credit risk which eventually leads to stripping the default correlation with the aim of explaining the volatility case of May 2005 score 30/30 submitted to University of Bologna

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