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Five-year default protection on media giant AOL Time Warner tightened more than 60 basis points last week after the company announced it had secured a USD10 billion bank loan facility on Monday, easing fears of a liquidity crunch. Mid-market five-year credit-default swaps tightened from 480 basis points over LIBOR at the start of the week to 415bps by late Wednesday in New York. Five-year protection had been as wide as 560bps at the end of the previous week. "A lot of people were worried that something would prevent or delay the closure of the bank loan, so when they signed it there was a relief," said one trader in New York, referring to some of the recent accounting scandals among U.S. companies. He added the cost of protection had been pushed up in recent weeks before the loan was finalized, perhaps even by banks in the syndicate. Despite the short-term gyrations in the default-swap market, AOL's credit rating remains stable, according to Andrew Watt, a director and AOL analyst at Standard & Poor's in New York. "Our rating anticipated this financing; our view was that this would be put in place, but the market had some attention on external events that had no bearing on the credit profile," he noted.

Alex Braun, director of funding and asset management on the fixed-income side, and Paul Caldwell, a senior asset-backed and high-yield bond portfolio manager, have left Abbey National Treasury Services. The departures are the result of a restructuring in the wholesale bank, according to a spokeswoman. Braun's responsibilities have been divided, with funding now being part of the Treasury division and asset management coming under a newly established division--asset management and risk transfer. It could not be determined whether Caldwell will be replaced. Braun and Caldwell could not be reached for comment.

Bank of America has hired Bronia Jenkins, chief marketing officer at Volbroker, as head of foreign exchange options in New York. At the same time, Mark Mullet, a senior fx options trader atUBS Warburg, has been brought on board to trade fx options. He reports to Jenkins.

The credit derivatives market could be heading for a bust up on the same scale as last year's Railtrack debacle over a little-known clause contained in the bonds of Marconi Corp., according to industry bankers and lawyers. One trader estimated hundreds of millions of dollars in Marconi credit protection was traded up until last summer when the company hit financial difficulties.

Commerzbank is pitching foreign exchange options trades that anticipate a calm summer market, predicting euro/dollar will not climb as dramatically as other banks are forecasting. Nick Parsons, chief currency strategist in London, was recommending two trades last week with the expectation that the euro will reach parity, but not extend more than three cents above its recent high of USD0.9985. One trading idea is buying a two-month euro/dollar double no touch option with barriers at USD0.95 and USD1.03 for 21.75% of the total payout, and sell a three-month double no touch with the same barriers for 11.25%, for a total cost of 10.5%.

KommuneKredit, an association which provides financing to Danish government organizations, will be using both cross-currency and interest-rate swaps on approximately EUR800 million (USD792 million) in long-term debt throughout the remainder of the calendar year. KommuneKredit issues roughly EUR6 billion in debt per year, EUR2 billion of which is long-term debt. The association enters either interest-rate swaps, fx swaps or both on approximately 80% of its long-term debt, said Jette Moldrup, v.p. in treasury in Copenhagen. The company has raised approximately half of its yearly requirement.

Deutsche Bank is consolidating elements of its global cash and derivatives credit business in a move designed to take advantage of increasing overlap between the various elements of the credit business, according to Rajeev Misra, global head of credit trading in London. However, one official familiar with the firm said the moves are motivated by a need to cut costs, which Misra denied.

Deutsche Bank is looking to hire two to three mortgage-backed traders as part of an initiative to put its agency mortgage-backed trading team under the umbrella of fixed-income derivatives, said Jon Kinol, managing director of fixed-income derivatives and cross-rates trading in New York. The desk, which deals with Fannie Mae and Freddie Mac-related products, has previously been alongside other mortgage products such as commercial mortgage-backed securitizations.

Dollar-denominated risk reversals have dominated the foreign-exchange options market throughout the last four weeks and traders have seen volumes increase even more in the last two weeks. One trader said he had seen four to five yards of risk reversals in euro/dollar and dollar/Swiss combined go through the market each week for the past month, compared with a more typical one to two yards. Another trader said he saw three to four times typical levels for euro/dollar and dollar/yen, but would not give a base volume. Investors bought dollar puts against the euro, yen and Swiss franc as the dollar weakened against the three currencies. The typical sizes of the individual trades is USD30-100 million.

The cost of dollar/euro options edged slightly higher last week as the common currency continued its assault on the greenback in the spot market. One-month implied volatility rose to 12.1% by Wednesday in New York, up from 11.5% at the start of the week as the dollar gave up gains it notched up during the preceding holiday-shortened week. Traders said although the euro still appears headed higher, the options market has been somewhat choppy as punters take profits once spot hits USD0.98, only to enter new long euro options once spot falls to USD0.97. Spot was trading at USD0.989 Wednesday.

Fleming Companies, the largest distributor of packaged foods in the U.S., is planning to become a regular end user of foreign exchange derivatives to hedge exposure to the Canadian dollar, according to Matt Hildreth, senior v.p. of finance in Lewisville, Texas. The company has in the past only used fx derivatives sporadically--twice in the last five years--but is now gearing up to increase its use of fx options following last month's acquisition of Core-Mark International. The packaged goods distributor has four of its 19 distribution centers in Canada. Hildreth estimated Fleming will enter options on a monthly basis, typically USD20-25 million (notional) per month, to hedge against movements between the greenback and its northern neighbor. He was unable to quantify the revenue Core-Mark generates in Canada.

The low interest-rate environment and the tightening in Asian credits have caused many investors to start considering structured investment products for yield enhancement by taking either market risk or credit risk. Usually, a structured investment product can offer yield enhancement based on a specific market view. A LIBOR corridor is a typical example. A LIBOR corridor note will offer extra return if LIBOR evolves according to the range determined at the outset of the transaction while the downside is a loss in coupon or part of the principal if the actual market movement goes against the view. This kind of structured note is usually issued from the European medium-term note program of reputable issuers, with payment of coupon or sometimes principal linked to the evolution of one or more market parameters, such as an exchange rate or interest rate.