What is the typical notional value of a credit default swap?

The typical notional value of a credit default swap (CDS) generally falls within the range of $10 million to $20 million. This range reflects common market practices, as CDS contracts are often structured to be sizeable enough to capture significant credit risk while still being manageable for investors and institutions.

This value is based on the needs of market participants who typically use CDS not just for hedging but also for speculation or arbitrage activities. The $10 million to $20 million range allows for effective risk management without overwhelming exposure, making it a standard choice for institutional investors and hedge funds.

While smaller or larger notional values may exist, the prevailing norm in the market aligns with this range due to the liquidity and marketability of contracts at these values, as well as historical data surrounding CDS transactions. Lower notional values such as those under $10 million may not be as commonly offered in the market, and higher notional values might increase risk exposure considerably, which could deter risk-averse investors.