The first inter-dealer credit option with a one-year maturity has traded, underscoring the expansion of the liquidity frontier in the mart. As first reported on DW's Web site on Tuesday, the London trade is a straddle on the Series 5 iTraxx Europe with a March 2007 expiry and 50 basis points strike. Goldman Sachs, UBS and a third undisclosed counterparty were involved in the deal. Further details could not be ascertained.
Matthew Reid, hybrids trader at UBS in London, said credit structures with volatility exposure beyond the six-month point are becoming increasingly popular. "A longer-dated volatility market is an important step in the development of the structured credit business," he noted. Trading officials at Goldman Sachs declined comment.
One trader at a European house said investors are showing more interest in longer-dated options, speculating this trade has been structured to hedge client business. Another trader noted his firm is studying inter-dealer trades to offload positions on their books. At present, there is only a market for three-month, six-month and occasionally nine-month expiries. This is because players have been unwilling to take long-dated bets on indices which change every six months.
Omar Syed, senior structured credit broker at ICAP, which brokered the trade, said the advent of one-year expiries is symbolic of the growth in the market and should act as a catalyst for the longer dates structured products linked to credit volatility. "Now there is more scope for hedging long term volatility views" he noted. Syed declined to name the third counterparty.
