In relation to credit derivatives (credit default swaps, CDSs, and other similar products), it is the average of the single-name CDS spreads (CDS spread for a single name) for all the constituent names in the CDS index, weighted by probability of default (PD).
The theoretical spread is the starting point for calculating the market spread (real spread/ intrinsic spread). The theoretical spread has to be adjusted using a flat credit curve.
It is also known as the fair spread.
