CDS spread value is primarily based on what factors?

The CDS (Credit Default Swap) spread value is fundamentally tied to the probability of default of the reference asset. This is because the CDS serves as an insurance policy against the default of a borrower. When assessing the creditworthiness of an entity, investors evaluate the likelihood that it will default on its obligations.

If the perceived probability of default increases, the risk associated with the reference asset elevates, leading to a higher CDS spread. This increase reflects the greater compensation that investors require for assuming the heightened risk. Conversely, if the probability of default decreases, the CDS spread will typically decline as the risk corresponds to the lower likelihood of default.

While other factors, such as the market rate, asset demand, maturity of the asset, and stock volatility can influence pricing in the broader sense, the probability of default remains the primary driver of the CDS spread. It directly impacts the perceived credit risk of the underlying entity, making it the key factor in determining the cost of credit protection.