A credit default swap (a type of default swap) in which the reference obligation consists of a basket of obligations (assets such as corporate bonds, entities, etc). In this sense, a basket default swap is a contract similar to a credit default swap, except that it is linked to a basket of reference entities rather than a single reference asset. Basket credit default swaps typically include five to ten reference obligations.

This swap is associated with higher default risk, especially when the default probabilities of the obligations in the basket have a low correlation. Therefore, the lower the correlation of the basket’s obligations, the higher is the basket default swap premium, and vice versa. A payoff will be triggered when the first of these reference obligations (reference entities) defaults.

A credit default basket swap can terminate either if the Nth default in the basket occurs during its time to maturity, or when the swap reaches its maturity date. In the former case, the protection seller is obliged to pay the protection buyer the difference between the notional amount of the Nth reference obligation and the recovery value. In addition to cash settlement, the parties can agree on physical settlement in which the protection seller would buy the underlying obligation (asset) for its par value (which is, of course, higher than its market value).

This swap comes in different types including: Nth-to-default swap, add-up credit default swap (or linear credit default swap), etc.

It is also known as a multi-name credit default swap.