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Cavanaugh Capital Management will buy some $50 million in mortgage-backed securities. Jim Dugan, portfolio manager of $700 million in taxable fixed-income, says that with interest rates a bit higher than their lows, and perhaps climbing as geopolitical risk subsides, he sees prepayment risks diminishing. Cavanuagh will buy shorter-maturity securities that have lower extension risk than conventional 30-year pass throughs. These include 15-year Ginnie Mae midgets, balloon mortgages with a final maturity of five- to seven-years and certain Planned Amortization Class (PAC) bonds that are structured to limit extension risk. Dugan says Cavanaugh is in the market now making the purchases, and hopes to have the program complete within three weeks.

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The Kiwi dollar interest rate derivatives market has seen its highest volumes since the mid-1990s in recent weeks as foreign corporates have turned to the currency to issue debt. Mark Currie, head of interest rate trading at Deutsche Bank in Auckland, predicted interest rate swap volumes could surpass last year's levels by 50-100%. He noted that eurobond issuances for the first quarter of last year was around NZD500 million and there has already been over NZD800 million in issuance half way through the first quarter this year.

This column will discuss the option-like exposures of a number of hedge fund strategies based on a review of the current literature. Specifically, recent academic articles have argued that implicit options arise in hedge fund products due to the following factors: * The tailoring of return-to-risk profiles to certain classes of

Credit default-swap trading on South Korea jumped last week on the back of heightened concerns about North Korea's nuclear policy highlighted by a change of outlook to negative from positive by Moody's Investors Service. "Trading has been three to four times normal volume," said one credit derivatives head, commenting on Korean default-swap protection. He added, "It's likely that some banks are getting nervous," noting that end users have been purchasing credit protection on the sovereign.

Credit Lyonnais is planning to start trading offshore over-the-counter equity derivatives on Indian names in the coming weeks. "This has huge potential," said Nicolas Cohen-Addad, head of equity derivatives in Hong Kong, adding, "People are becoming more interested in the Greater Asian markets including China and India." Lyonnais began Indian cash equity trading in November out of Hong Kong and expects to start offering OTC products in the coming weeks, said Cohen.

Erste Europäische Pfandbrief- und Kommunalkreditbank, a Luxembourg-based agency that lends to state authorities within the European Union, has entered a cross-currency basis swap to convert CHF200 million (USD147.67 million) of a recent CHF300 bond offering into a euro-denominated liability. Markus Thesen, head of treasury, said the EEPK converted a portion of the offering into euro-denominated exposure in order to provide a liability match for its asset portfolio, which is 60% denominated in euros, 30% in U.S. dollars and 10% in Swiss francs. In the swap, the agency is paying Euribor plus a spread and receiving Swiss franc LIBOR plus a spread. Thesen declined to be more specific. The swap matches the three-year maturity on the bond.

Merrill Lynch has hired Jim Crimmins, managing director and head of the financial strategies group at Morgan Stanley in New York, as a managing director and senior derivatives marketer. Michael DuVally, spokesman at Merrill in New York, said Crimmins, who will start at the firm in early March, will work with interest rate, long dated foreign exchange and credit risk management for corporate clients. This activity includes interest rate swaps. Crimmins did not return calls.

Five-year credit-default swap spreads blew out 70-80 basis points early last week on ThyssenKrupp, the German industrial conglomerate, in reaction to Standard & Poor's putting the company's BBB credit rating on negative watch. The credit was trading at 220-240bps Thursday from about 150-160bps Monday, according to traders in London. Volume jumped three times to around 10 trades a day, said one dealer.

Marc Saffon, head of financial engineering at Société Générale Securities in Tokyo, has moved to Paris as head of financial engineering, ex-France. He reports to Denis Alexandre, global head of financial engineering in Paris, according to a spokeswoman in London. Reasons for the move could not be determined by press time. Alexandre and Saffon did not return calls.

McDATA Corp., a Broomfield, Colo.-based firm specializing in the production of fiber channel switches and software for storage area networks, has entered into a derivatives-based share option transaction in order to convert part of a recent USD150 million convertible subordinated notes issue into company stock. Linda Dellett, v.p. in investor relations, said under terms of the issue the notes are convertible into shares of McDATA's Class A common stock.