Dear all,apologies in advance for the eventual naiveness of the question. I was taking a look at Itraxx 3 Yrs levels these days. It seems that there is a certain market consensus in setting the level of the credit index swap at around 12 bps. Within such an average value, pricing the equity tranche of the corresponding 3 Yrs CDO would result in a premium which is below the threshold of 500 bps running and therefore with a negative upfront payment. (i.e. the protection seller would have to cover an upfront amount in order to receive 500 bps running during the life of the trade). The thing that is actually puzzling me is that if you look at the "global correlation daily" report issued by JPM, the reference level is still settled at 18 bps (which is suprisingly the same level of the CDX IG, for which one would expect wider values) with a bid/offer on the equity tranche of the 3 Yrs at 2.8%/4.3% (+500 bps running). The same information can be retrieved on the bloomberg (JPTX page, I suppose, but I'm not sure, not being a Bloomberg expert). How would you explain such an inconsistency, if any?TIA

Zub, The protection seller does not pay an upfront.The buyer of protection has pay the running spread (500 bps per annum) and also pay the upfront for the equity tranche. Is this where you are going wrong? The 3 year point for index tranches is a much less established point than the 5,7, and 10 year points.

Bigbird, I agree with you that the standard practice is that the protection seller does not pays an upfront, on the contrary he usually receives such a payment. I was just mentioning the case in which spread are so tight that the running premium fee falls below the 500 bps threshold. What happens in that case? Anyway the question was not on this specific point (as I wrote, I supposed that there may be two solutions, either the protection seller simply receives less than 500 bps or he may also pay an upfront covering such a difference); my question was more on the differences between the ref spreads seen on the 3 Yr point.

Perhaps someone read these posts. Today's JPM report (which concerns friday's market) sets the 3 Y spread at 13 bps, and does not give any quote for the 3 YR tranche structure.....