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In a stochastic volatility world where the volatility is bound to stay below a certain level, Nicole El Karoui1 has shown that it is possible to delta hedge a convex position, such as a call option, with the Black Scholes model and make sure that the profit and loss from this strategy is almost surely positive. This gives a non-competitive upper replication price.

Last week's departure from Merrill Lynch of Glenn Barnes, European head of structured credit, opens the door for a reunification with his fellow credit "dream team" stars T.J. Lim, former European head of debt, and Kevin Krespi, former head of debt for the Pacific Rim, according to industry sources. The group first came to prominence as the heads of a team at UBS before moving to Dresdner Kleinwort Benson and then Merrill. Now that Barnes, like Lim and Krespi, is without a position, City watchers say the trio could reunite to form a credit "supergroup." Lim, Barnes and Krespi declined comment.

Science Applications International, a Fortune 500 research and engineering company with more than USD6 billion in revenue last year, is considering entering its first interest-rate swap on the back of a recent USD800 million bond issue. The company is reviewing swap transactions with potential counterparties, according to Ron Zollars, spokesman in San Diego.

"If they've got something creative, we're willing to listen."-- Kim Pulliam, senior v.p. at AmeriCredit in Forth Worth, Texas, commenting on the firm's financing policy. For complete story, click here.

Trinity Industries, a diversified industrial company with revenues of USD1.8 billion, may look to enter a swap to convert the proceeds from a recent floating-rate bank loan facility into a fixed-rate obligation, said Jim Ivy, cfo in Dallas. The company raised USD425 million in a syndicated loan a few weeks ago to renew a loan that was set to expire. The new loan is comprised of USD275 million in three-year debt and USD150 million in five-year debt.

Shinsei Bank is considering boosting its credit derivatives investments, eyeing Japanese synthetic collateralized debt obligations in the coming months. "We're looking for an opportunity to build our exposure to Japanese credits," said James Mudie, deputy general manager in the structured trading division in Tokyo. Mudie continued that the bank has been an active investor in global synthetic CDOs for over a year but is looking to invest in Japanese credits as it has a greater familiarity with the names. However, it has yet to invest in any domestic structures as they are not yet available in the modified restructuring language in Japan. "We're an advocate of the modified restructuring language," said Mudie, noting that it only invests in credit derivatives with the new language, as it has become the global standard.

A quartet of bankers and analysts from Bear Stearns, Putnam Investments and a research firm have joined forces to launch a telecom, media and technology long/short equity hedge fund that will use over-the-counter derivatives. The fund, dubbed Pythar Capital, is expected to start trading on Oct. 1 with USD25-40 million and will be based in the Boston area.

Tate & Lyle, a London-based global sugar, cereal sweetener and starch processing group, recently issued GBP200 million (USD300 million) in bonds and used foreign exchange swaps to convert the majority of proceeds into U.S. dollars and euros. Philip Brown, head of treasury in London, said there was investor demand for sterling debt and the fx swap offered the company the best execution on the deal. Brown explained that Tate & Lyle's primary borrowing currencies are U.S. dollars and euros. If it issues in a different currency it often uses fx swaps to convert offerings back into those currencies. The company, however, does keep a portion of its debt in sterling, although Brown declined to disclose that figure. Brown would not elaborate on the percentage of the offering converted into U.S. dollars and euros.

WestAM, the asset management arm of WestLB, plans to launch its first two hedge funds in September. Markus Stadlmann, director of global asset allocation, said the firm has been aiming to launch these types of funds to its existing clients because over the past two years it has seen strong demand from continental Europe for absolute-return strategies. Investors have been asking for investment vehicles that offer diversification benefits under adverse market conditions, he explained.

UBS Warburg and Merrill Lynch are structuring more inflation-linked credit-linked notes because of increased investor interest, which they predict will lead to additional business over the next year. Colin Alexander, director in structured products at UBS in London, said his group has structured a handful of transactions in the past month, and expects demand to grow at double that rate each month for the rest of the year. The bank structured a few of these investments over the past year, but Alexander said he is now spending half of his time working on these deals. A Merrill Lynch official confirmed it is working on these deals, declining further comment.

Melissa Parker, portfolio manager with Nelson Capital Management, says she will move 5%, or $10 million, of the firm's portfolio, out of agencies into top-tier corporates on the view that well-selected corporate names should perform well as the economy recovers.

Segall, Bryant & Hamill will look to sell corporate bonds while increasing its mortgage-backed securities allocation by about $60 million to move up in coupon. Jim Dadura, portfolio manager of $1.2 billion in taxable fixed-income, says the firm will start looking at 6.5-7% coupons in 30-year Fannie Mae and Freddie Mac bonds and 6-6.5% coupons in 15-year pass-throughs, probably after the Federal Reserve's first interest-rate hike. The firm will make the move in anticipation of an eventual decline in the rate of prepayments. Dadura says he expects the Fed's first move to occur late this fall, and he believes a 50 basis point hike is the most that will occur by year-end.