Free content

Entergy-Koch Trading plans this week to launch what it considers to be the first indices on wind power and will offer derivatives based on them to wind-power generators in Europe and the U.S. The indices will measure the deviation in wind strength from normal levels in parts of Europe and the U.S., including northern Germany, Denmark and Texas, according to David Pethick, senior quantitative analyst in London.

Barclays Capital is recommending clients buy receiver swaptions because it does not think the Federal Reserve will tighten monetary policy as quickly as the forward curve implies. Brad Stone, head of U.S. fixed-income marketing and derivatives strategy in New York, said the trade is based on his assumption that while the recent flattening of the yield curve will reverse over the short-term, he expects a "bull flattener" starting late in the fourth quarter. "We see the pullback in short swap rates as an opportunity to put on carry trades in the short-end of the swap curve. A carry trade is a trade that is based on the belief that rates and the curve are not likely to change, Stone said. "Where the rates are going to be in six months is similar to where they are today," he predicted.

Credit derivatives traders have started to quote the price of protection on low-credit quality names in terms of an up-front premium rather than a spread over LIBOR for the term of the contract because of deteriorating credit quality. This is preferable to the sellers of protection because if the credit defaults early in the contract the seller has already pocketed the premium, according to Cameron Munro, European head of credit trading at National Australia Bank in London. Munro added, "What's the point of getting a 1,000 basis points if you are only getting it for a week?"

Deutsche Bank has hired Steve Beck, executive v.p. at Vertical Crossing, a structured products broker, in New York, to sell mortgage derivatives, according Jon Kinol, managing director of North American over-the-counter derivatives in New York. Beck was hired as a director to fill a new position on the cross-rates sales team. He starts Monday and will report toMal Brooks, head of cross-rate sales in New York. Deutsche Bank launched the cross-rates desk in late August (DW, 8/26). The desk trades and sells packages of risks made up of swaps, mortgages, agencies and government bonds.

One-month 25-delta U.S. dollar/Japanese yen risk reversals flipped to favor dollar calls/yen puts last week after traders bought dollar calls as their confidence increased that global equity markets would settle at levels higher than pre-Sept. 11. "It's a sentiment trade, a story the market wanted to believe," said a trader in London. Risk reversals flipped to 0.3 vol in favor of dollar calls/yen puts Thursday from 0.3 vol in favor of dollar puts at the beginning of the week. Risk reversals had been as high as 2.2 vol for yen calls in late September.

Dresdner Kleinwort Wasserstein has hired Marco Riccardulli, senior swaps trader at Commerzbank in New York, in a similar position, according to Vincent Parisot, head of fixed-income trading at DrKW in New York. Parisot said Riccardulli is filling a new position that was created as part of Dresdner's plans to grow its swaps trading team. He declined to specify an exact number of new hires the firm is planning, but said more traders would be brought in as demand for interest-rate products continued to grow. Riccardulli joined the firm at the beginning of the month. He reports to Parisot.

Spreads on Enron credit-default swaps widened about 500 basis points to 800bps on the back of the company's plummeting stock performance last week. Enron's shares have tumbled 55% over the last two weeks over concerns surrounding a lawsuit filed by the company's shareholders that alleges Enron misled investors by issuing false and misleading information about its future prospects. The lawsuit against Enron fueled fears that it could negatively impact future earnings. "There's been a real panic," noted a trader in New York.

Hedge funds will pile into the Japanese equity derivatives and cash market next month to take advantage of upcoming changes to the MSCI Japan index, according to officials at Merrill Lynch and Bear Stearns in Tokyo. The hedge funds are expected to enter total-return swaps, in which they pay the return of stocks leaving the index and receive the return of stocks joining, as well as equity basket options, according to Ken Chang, head of Japan and Asia Pacific equity derivatives strategy at Merrill in Tokyo.

Indian asset managers, including Reliance Capital Asset Management, are planning to execute their first interest-rate derivatives transactions following last Monday's rate cut that brought interest rates to lows not seen since the 1970s. Rajiv Baruah, co-head of Indian global markets at Deutsche Bank in Mumbai, said the rate cut to 6.5% could double the notional size of the market by the second quarter. He estimated notional daily volume is USD20-40 million. Asset managers account for 5-10% of the volumes at the moment but Baruah expects that to increase to 25-30%.

The World Bank and International Finance Corp. have teamed up with Aquila Energy to launch a global weather risk facility that will sell weather derivatives to companies in the emerging markets. Ulrick Hess, project officer at the IFC in Washington, said the IFC plans to supply up to USD10 million in risk capital to the facility with Aquila putting up USD20 million and a group of five reinsurance companies and banks putting up another USD10 million each. The IFC's capital will only be called upon in the event of losses. Calls to Aquila were not returned by press time.