The CJ50 index that tracks the movement of Japan’s 50 most actively traded credit default swaps started trading today, with volume reaching beyond ¥10 billion ($83 million), according to BNP Paribas.The index was created by Bank of Tokyo-Mitsubishi, Goldman Sachs and BNP Paribas. Crédit Lyonnais, UBS and UFJ are also dealers of the index and Stéphane Delacote, Tokyo-based head of Asia-Pacific credit derivatives at BNP Paribas, said several new dealers are expected to make markets in the index in the near future.
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.
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