What is a contract for difference in Japan?
Since 2012, Japan has been in a quantitative easing program, with its central bank purchasing more than $70 billion in assets every month. It has provided a massive boost to Japan’s economy and markets – but not everyone is convinced it will continue indefinitely. However, with interest rates at near-zero percent across most developed countries, many investors have sought alternative ways to play the rebound in Japanese stocks(view website for more info).
ETFs
One such method is buying exchange-traded funds (ETFs) that track specific indices or sectors within Japan’s market. In some cases, however, these ETFs are denominated in foreign currencies such as the US dollar or Euro, meaning that if any appreciation occurs against your currency, they can also lose value relative to other investments.
What is a CFD?
A contract for difference (CFD) is an over-the-counter derivative instrument in finance. It allows two parties to exchange the difference between opening and closing prices of a share, currency, commodity, or another instrument. In Japan specifically, these derivatives function as speculative tools that investors can use differently.
Leveraged equity swap contract
A specific type of CFD available in Japan is the Leveraged Equity Swap Contract (LESC). This product was initially created in 2008 by Shinko Securities Co., Ltd. and has become an established financial tool following its recent trading volume increase, having reached 143 trillion yen in December 2017.
The LESC enables users to bet on the direction of equity prices without actually buying stocks. This contract is specifically helpful for those who believe the price of a stock will increase, as opposed to generally active traders and investors that use CFDs and other similar tools to profit from both rising and falling markets.
The LESC can be executed at any time during market trading hours until the agreed-upon settlement date. As long as there is no predetermined expiration date, these contracts may be left open indefinitely.
The investor’s loss or gain depends entirely on how the underlying asset performs up until closing time; this means that losses are amplified if an unfavorable move occurs in the last moments before fulfilling the contract. Thus, it becomes apparent how this product could make it easier for someone to lose everything they own quickly.
However, this tool also has many benefits. The LESC requires little to no maintenance fees or margin requirements, making it low-cost and risk-free for investors. Furthermore, users are not required to pay any commission when opening a contract because the brokerage firm does so without collecting fees. It allows the firm to earn money by taking a cut of the profits after closing contracts successfully. Users can invest in numerous different LESCs simultaneously with just one account, conveniently spreading their investments across different assets.
Tokyo Financial Exchange Incorporation
One other type of derivative available in Japan is called Topix Reversal Futures. Launched in 1993 by the Tokyo Financial Exchange Inc., these contracts allow participants to trade American-style options with one year of expiration terms. By using Japan’s Topix Reversal Futures, investors and speculators can hedge against foreign exchange risks and benefit from changing prices in commodities.
Currently, trading volume is around ¥ 1 trillion per day. However, this number had fallen drastically since 2010 when it reached a peak of ¥ 2.26 trillion on May 31, 2010. This downturn can be attributed to the recent decrease in volatility, which occurs when market price movements are minimal or nearly absent for a more extended period.
There have been more days where trading did not occur at all than days where volumes reached the ¥ 1 trillion mark since 2010.
In conclusion
Nonetheless, these contracts remain a valuable tool for those looking to make gains by utilizing leverage and hedging against risk. Furthermore, Japan is one of the most prolific users of derivative products globally, as seen by its high volume trade statistics from the Tokyo Financial Exchange Inc.