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Deutsche Bank is recommending clients purchase one-year at-the-money U.S. dollar calls/yen puts to take advantage of low volatilities caused by the Bank of Japan's intervention to create a dollar floor around JPY119 and the belief in a U.S. recovery next year, said Ken Landon, senior currency strategist at Deutsche Bank in Tokyo. "It's a pretty straightforward strategy-a lot of people like that," he added, "anyone who wants to take a directional view would be interested."

Five-year protection in the auto sector widened by roughly 20 basis points across the board last week as a host of negative credit, earnings and technical issues led to higher protection costs. DaimlerChrysler widened from 175bps at the start of the week to 195bps by Thursday, despite the lack of any company-specific news.

Danish pension funds over the last two weeks have executed a flurry of swaptions, amounting to several billion euros in notional size, to hedge exposure to guaranteed annuity plans. Danica Pension pulled the trigger on the largest deal, having spent a premium of EUR75 million on an option to enter a receiver constant maturity swap, according to senior swappers at a major U.S. and a European derivatives house. A premium of that size was estimated to equate to a notional size of between EUR3-4 billion. The funds are believed to have come to market now because the fall in global interest rates and equity markets has left them with substantial liabilities on fixed-rate annuities. Officials at Danica declined comment and press officers did not return calls.

One-month Japanese yen/U.S. dollar implied volatility fell to 9.75% Thursday, down from 10.25% a week earlier, as demand for yen puts/dollar calls increased as the dollar continued to remain strong despite anthrax scares across the U.S. Hedge funds and investment banks were the most active, buying one-week yen puts/dollars calls as the one-month 25-delta risk reversal moved further in favor of yen puts. The options typically had strikes around JPY119.75 when spot was trading around JPY121.20.

Dearborn, Mich.-based CMS Energy is setting up a weather derivatives desk, which will be based in Houston. The energy company recently hired Aaron Studwell, a meteorologist at Reliant Energy, to develop trading strategies and research weather patterns. Studwell said he will be in charge of trading and plans to hire an additional trader--it currently only has one--when volumes pick up. "This is going to be a graduated effort. We want to be a player in this market and provide something more to our customers," Studwell said.

NIB Capital Asset Management plans to launch alternative investment products for its institutional investor clients. Willy Simon, advisor to the board in Utrecht, said it is looking at buying a hedge fund manager or a fund of funds within the next six weeks. The hedge fund managers will be free to use derivatives.

Bond Street Capital, an Englewood Cliffs, N.J.-based hedge fund specializing in managing distressed debt portfolios, recently bought five-year credit protection on auto equipment supplier BorgWarner. Sam Kim, a senior analyst at the hedge fund, said he made the trade because he believes the current auto slowdown in the U.S. is likely to be a long-term situation and auto suppliers, such as BorgWarner, are likely to lose their investment-grade rating. Another reason for the trade hinges on Kim's expectation that BorgWarner's credit is trading much tighter than it should be in light of continued widening of auto names.

Lehman Brothers is recommending investors enter long U.S. dollar/Japanese yen implied volatility positions because volatility has dropped to its lowest level in more than a year. Anne Sanciaume, foreign exchange strategist in London, said "people rushed to buy volatility as an asset class [after Sept. 11] and it is true that things have not gotten worse, so people have been unwinding these long volatility positions." However, Sanciaume believes investors are over-confident and have gone back too far in unwinding these long vol positions. One-year dollar/yen implied vol was 10.3% last Tuesday, close to lows set last summer. Sanciaume considers fair value to be around 11.5%.

Robert Rossman, head of interest-rate derivatives marketing at Credit Suisse First Boston in New York, left the firm abruptly on Tuesday, according to a headhunter. Rossman joined CSFB earlier this year from J.P. Morgan where he was head of swaps marketing for the Americas.

The Japanese credit derivatives market started to quote credits with the International Swaps and Derivatives Association's modified restructuring language Monday, after most dealers had agreed on this date. Market makers expect this to boost end user participation and Manabu Yokitomo, deputy manager of credit derivatives and structured finance at the Tokio Marine & Fire Insurance Co. in Tokyo, validated their claims. He said, "we're hungry for Japanese names and will look to invest as soon as the modified restructuring language is common," said Yokitomo. "We'll be more comfortable in investing in Japanese names [under the new language]," added Yokitomo. The insurer already sells credit protection in Japan and uses the modified language on U.S. and European names.

High-net-worth clients of Banque Banorient (Suisse) recently have been selling U.S. dollar calls/Swiss franc puts, on the view that the dollar will weaken from the highs it set earlier this month when U.S. equity indices rebounded to near or past their pre-Sept. 11 levels.