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Derivatives

Credit Trading Volume On PCCW Rockets

Credit-default swap trading volume on Hong Kong telecom giant PCCW rocketed last week on the back of a five-year USD400 million convertible bond issue by PCCW's subsidiary PCCW Capital.Emmanuel Dianflon, Asia head of credit derivatives at BNP Paribas in Hong Kong, said that on Monday and Tuesday over USD70 million traded, whereas before the issue the typical volume was USD10-20 million a week.

Demand for protection came from convertible arbitrage hedge funds, which were stripping out the credit and interest-rate risk components of the bond to isolate the equity option, according to traders. The funds also enter an asset swap, paying the fixed coupon and receiving LIBOR.

"I've been seeing trades going through at 215 basis points and 220bps," said Dianflon. Noting that the demand for protection caused the price to rise to 210-240bps from 170-200bps a week before.

"This is the first interesting thing that's happened in the Asian market this year," said a credit derivatives head in Singapore, noting that activity has been fairly subdued thus far.

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