Interest-rate traders expect volumes in the Asian interest-rate markets, particularly in Hong Kong, Singapore and Korea, to surge after New Year, as customers enter derivatives on the belief that rates are bottoming out. "There will be a dramatic pickup," said Rinesh Mehta, exotic and plain-vanilla options trader at BNP Paribas in Singapore, adding, "volumes in the [Asian] option markets will increase by 50-75%." Average daily volume in the Hong Kong interest-rate options market is currently around USD3-400 million. Mehta continued that corporates, which have been on the sidelines waiting for rates to bottom-out, have started inquiring about entering interest-rate derivative transactions at the onset of 2002.
In typical transactions corporates will enter interest-rate swaps across the curve to match their needs, paying fixed and receiving floating to lock in low rates. Mehta also expects an increase in structured interest-rate products. For instance, an end-user could enter a five-year swap, borrowing at 4% in a knock-out structure, whereby if three-month HIBOR rises to 7%, the structure is knocked-out. Such a structure reduces funding costs noted Mehta. In a plain-vanilla five-year interest-rate swap, the client would be paying around 4.5%. Mehta also expects increased demand for callable structures, such as step-up callable notes, where the firm has the right to call back the structure. In these structures the corporate would usually get an extra 100 basis points.
