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One-month euro/dollar implied volatility jumped to 13.2%/13.5% on Thursday from 12.05%/12.75% on Wednesday. The rise in implied vol followed a drop in the euro in the spot market versus the greenback to below USD0.92. Vol rose as euro/dollar spot fell because demand for euro puts/dollar calls escalated as traders hedged their positions. London-based traders said with the euro falling below USD0.92, the one-month risk reversal is favoring euro puts, whereas it previously favored euro calls. The most demand was for one-week euro puts struck at USD0.90, and even some that went down as low as USD0.80. The options had notional sizes of USD30-50 million. The euro fell against the dollar from USD0.9296 on Monday to USD0.9028 on Thursday.

Credit default swap spreads on sovereign Japan continued to widen last week. Five-year credit default swaps traded early in the holiday-shortened week at 18 basis points, and 10-year credit default swaps at 27bps, up from 16bps and 24bps respectively in mid-January, said Sam Vulakh, managing director, credit derivatives at Bear Stearns in Tokyo. Credit default pricing on banking and corporate credits also continued to widen, he said.

This series of Learning Curves examines the ability of interest rate models to capture relevant market information, in particular the observed market-implied volatility surface. Part I investigates the interest rate derivatives available in the market.

KPMG is looking to hire three derivatives-conversant consultants to join its corporate treasury services practice in London. Dominic Bennett, senior manager in the corporate treasury services practice in London, said the individuals will advise U.K.-based treasurers on risk management techniques. He added the recruits "need to be knowledgeable about risk management but they don't need to be rocket scientists." This is because corporate treasurers are looking for simple solutions, such as options or forwards, rather than exotic products that are hard to understand and may bring accounting complications if they cannot be easily marked to market.

Lehman Brothers has hired three senior interest-rate derivatives marketers and an options trader from J.P. Morgan in New York. The quartet is the latest in a wave of interest-rate derivatives bankers who have resigned from J.P. Morgan and Chase Manhattan since the two firm's merger and following bonus payouts last month (DW, 2/5, 2/12).

Five-year credit protection on Lucent Technologies traded steadily higher last week on the back of its credit rating being downgraded and concerns about the company paying dearly when rolling over bank borrowings. Reports of a Securities and Exchange Commission probe into accounting practices at the firm also may have spurred activity, although Lucent issued a press release noting that it had itself flagged these issues with the SEC late last year.

Marten Touw, head of global markets, North East Asia at Standard Chartered Bank in Hong Kong, resigned last week and will join Japan's Shinsei Bank, formerly known as Long-Term Credit Bank of Japan. Touw said he will take a new position at Shinsei, declining to provide details. At Standard Chartered his responsibilities included oversight of the firm's North East Asian derivatives business across all asset classes.

Lehman Brothers is recommending clients enter a four-month zero-cost risk reversal in euro against the U.S. dollar. In the trade clients sell a European-style euro put/dollar call struck at USD0.8640 and buy a European-style euro call/dollar put struck at USD0.958. These strikes were quoted when spot was trading at USD0.9085 on Thursday.

Swiss Re New Markets is planning to offer insurance-related products for the CO2 market, but has elected for now not to trade CO2 emissions credits because there is insufficient liquidity in the instruments. The firm will revisit the topic after the United Nations Framework Convention on Climate Change Conference of the Parties in June, which is expected to clear up ambiguity surrounding the market, according to Chris Walker, associate director in Zurich. In July the firm started a feasibility study regarding trading emissions credits (DW, 7/24).

Rayner Associates is buying select secondary corporate credits on the view that their spreads are still lagging the primary market in reacting to the Federal Reserve rate cuts, with investors able to pick up an additional 20-30 extra basis points, according toArno Rayner, chairman. The firm, which manages $150 million in taxable fixed income, is using new money and cash earned from dividends and interest to buy single-A rated or better bonds with durations of eight to 13 years.

Manning & Napier Advisors, Inc. is selling Treasuries to purchase high-quality corporates it expects to weather the slowing economy, along with agencies, whose current spreads are wide on a historical basis. George Nobilski, president of the firm's fixed-income division, which runs $3 billion in taxable bonds, says his recent purchases include the 10-year paper of Corning (A2/A) and Pepsico (A1/A), whose respective spreads over Treasuries are 150 and 125 basis points, and five-year Diageo Plc (A1/A+), at 150 over."The names we're buying are on the conservative side," he says. "We're starting to pick and poke at some of those values."