The index is designed to allow participants to hedge their credit portfolios by buying a diversified protection on Japanese credits with a tight bid/offer spread, said Delacote. While he admits it is "not a perfect hedge", he maintains it would nonetheless be effective in hedging a portfolio of Japanese credits. Also, buying protection on the portfolio of the 50 most liquid Japanese credits is more economical than buying protection on each individual credit in a portfolio.
Notional amounts of contracts range from ¥500 million to ¥1 billion. By late Thursday, the index was quoted at a bid/offer spread of 35/36. “The bid-offer spread of 1bp provides banks with lower transaction costs than any of the underlying credits in the Japanese CDS market, which includes Japan sovereign quoted today with a 3bp bid offer spread (16/19),” BNP Paribas said in a statement.
The week on Risk.net, November 25-December 1, 2016Receive this by email