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Deutsche Bank, Schroder Salomon Smith Barney and UBS Warburg are pitching swaption trades that take advantage of the high levels of volatility across the swaps curve in Europe and the U.S. Deutsche Bank is recommending selling euro and U.S. swaptions, in which the investor pays fixed and receives floating. This is because the forward curve is predicting higher rates, while Deutsche Bank predicts rates will remain low, according to George Cooper, global fixed income strategist in London. Specifically, the firm is recommending selling a one-year option to enter five-year swaps or five-year options to enter five-year swaps in both the euro and U.S.

Salomon Smith Barney Australia started marketing today the first capital guaranteed product in Australia linked to Asian indices that allows investors to lock-in quarterly gains without downside exposure, according to Luke Randell, managing director of trading and derivatives in Sydney. "It's the first capture-the-peaks market-linked investment of its kind in Australia," proclaimed Randell, adding, "We plan to launch additional products linked to a range of indices as well as individual domestic stocks."

Dexia Municipal Agency, a French public sector financing agency, has entered an interest rate swap on a recent EUR1 billion (USD982 million) bond offering. In the swap, Dexia is receiving the fixed rate on the bond--4.25%--and paying Euribor plus a spread, said Véronique Hugues, funding manager in Paris. Hugues said Dexia entered the swap because it prefers to avoid interest rate risk by maintaining floating-rate exposure on its debt portfolio.

Pacific Asset Management, a Singapore-based fund manager with USD65 million in assets, is gearing up to start trading credit derivatives for the first time by year end. "Credit derivatives will allow us to increase our flexibility," said Desmond Soon, investment manager in the Lion City. He continued that the fund manager is looking to both purchase and write credit protection for its fixed-income portfolio and that the notional size could reach over USD50 million.

Credit Lyonnais has hired Ken Chan, interest rate options trader at Bank of America in Hong Kong, in a similar role for its Hong Kong desk, according to Frédéric Lainé, Asian head of fixed income and derivatives in Hong Kong. He declined further comment.

This is the first in a two part series that demonstrates how the short-term view of day traders can contribute to the formation of a market bubble. This week's article focuses on risk and return in neoclassical finance and next week's looks at risk and return in intrinsic time.

Colonial Pipeline, an interstate transporter of energy products with USD1.2 billion in total debt, is planning to enter an interest rate swap to convert part of an outstanding fixed-rate bond into a variable-rate liability. Craig Nunez, treasurer in Alpharetta, Ga., said the company is looking to take the USD50 million piece of fixed-rate it has remaining from a USD150 million note issue due in 2007 and convert the principal into a floater.

The Polish Ministry of Finance has agreed to review provisions for netting derivatives transactions in a draft bankruptcy bill. The Polish Bank Association has held meetings with the government and is optimistic that all financial institutions will be able to net transactions within a year, according to Norbert Jeziolowicz, policy advisor to the president of the Polish Bank Association in Warsaw.

HVB Real Estate Bank, the commercial mortgage lending arm of HypoVereinsbank, with assets of EUR79 billion (USD77.59 billion), has entered two cross-currency interest rate swaps in the past two weeks. The first was to convert a fixed-rate NOK500 million (USD66.69 million) bond offering into a synthetic floating-rate euro-denominated bond. The firm is paying Euribor plus a spread and receiving a fixed rate in the swap, said Christian Barrakling, a trader in the asset and liability management group in Munich. He declined to disclose the exact levels HVB Real Estate is receiving and paying. Den Danske Bank Group is the counterparty on the swap and the underwriter of the bond.

"The Restructuring credit event has become the greatest source of uncertainty and potential for dispute in what is a crucially important risk distribution channel for banks."--Blythe Masters, portfolio manager at JPMorgan in New York, underscoring the magnitude of the restructuring debate in a recent letter to the International Swaps and Derivatives Association. For complete story, click here.

Salomon Smith Barney Australia has expanded its equity derivatives operation in Sydney over the last month with three hires and has started marketing equity derivatives to hedge funds. Luke Randell, managing director of trading and derivatives in Sydney, said, "We still think there's growth in the business." He plans to transfer additional staff for the group in the coming months as part of the buildup, but declined to elaborate on future hires or the size of the operation.

The cost of U.S. dollar/euro options rose last week, as the common currency gained against the greenback amid weaker U.S. equity markets. One-month implied volatility for euro/dollar options rose to 11.2% Thursday in New York, compared to 10.5% Monday, according to traders. Vol and the dollar move inversely in the current cycle. "The level of implied vol is rising and the skew for risk reversals is even more in favor of euro calls. The correlation is picking up between the dollar and U.S. equity markets," said one options trader. Spot was approaching parity at USD0.9950 Thursday morning, up from USD0.98 Monday. Common trades were for investors to buy euro calls above parity across all tenors.