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In the latest twist in traders' growing interest in taking positions in Mother Nature—such as weather derivatives and catastrophe bonds—a forest management consulting firm in Ketchum, Idaho, is planning to launch a fund that would buy easements on forests, with a view to trading CO2 credits generated by the assets. Forest Securities is looking to raise some USD20 million from institutions and high-net-worth individuals in the next six months, and is already in negotiations to acquire easements on assets, Cody Walden, president and ceo, told DW. The fund could grow to USD200 million within the next several years, he estimated. It would look to trade over-the-counter CO2 emissions credits, and set up a trading exchange to help unlock value from the forests. "By acting early, you can get the...highest performing projects for the best pr

Landesbank Hessen-Thüringen Girozentrale is preparing to test a credit default swap pricing model developed by professors at Goethe University. Carsten Sausner, a financial mathematician at Helaba, said the model prices credit default swaps using parameters including Euribor, the 10-year swap rate and the price of the credit's corporate bonds. The bank plans to turn the raw equations into a calculator and then test it against market prices. After testing for three months, the bank will determine the effectiveness of the calculator. Han Lee, head of model development and quantitative pricing at Reech Capital in London, said there is no single model that the market uses to price credit default swaps. He said consensus is moving toward an intensity approach, where the price is calculated from market data, such as interest-rate swap spreads and credit default swap prices for other names. The alternative method, firm valuation, looks at the fundamentals of the credit.

Centrobanca has sold to Banca IMI a six-month knock-in put on shares of Banca di Roma, in order to hedge a recent reverse convertible issue. Luca Colombo, trader at Centrobanca in Milan, said the strike on the put is EUR1.178 (USD1.118) with a knock-in at EUR0.9424. The six-month note boasts an 8% coupon, or 16% on an annualized basis. The notional size of the put is EUR3.3 million. Last Tuesday, the underlying stock closed at EUR1.22. SanPaolo IMI bought the reverse convertible in a private placement, according to Alessandro Canali, head of structured products at Banca IMI in Milan. Banca IMI is the investment banking affiliate of retail bank SanPaolo IMI. An official at SanPaolo IMI said it bought the reverse convertible on Banca di Roma because the note offered a high coupon and it thinks Banca di Roma's share price will not be below the strike level in the next six months.

Hirst Investment Management, an Orlando, Fla.-based alternative investment firm, is launching the Hirst MetaStrategy Ltd fund, targeting investors with a minimum investment of $100,000. The hedge fund uses what Gary Hirst, founder and chairman of Hirst Investment Management, calls a computational-intelligence model that puts about 20 major hedge fund strategies to use, including long/short, emerging markets, market neutral and merger arbitrage. This system, Hirst said, will create allocations for different investment styles and targets steady annualized returns of 18-20% a year. "I've been in alternative investments for 27 years," Hirst said. "And the most important factor in determining your investment return and risk is your choice of styles." The fund carries a 2% management fee and a 20% performance fee, he added. "We're not going to make 50% any year," Hirst said, noting his main goal for the fund is preserving capital, not trying to achieve wildly above-average returns. "If you can make 20% a year, every year, that's a good return," Hirst said.

The credit derivatives market is torn over the issue of restructuring as a credit event, but is urgently trying to reach a resolution before liquidity drops, according to International Swaps & Derivatives Association credit derivatives documentation task force meeting minutes obtained by DW. Players continue to be at odds regarding whether restructuring should be a credit event under standard quoted prices for credit default swap contracts, and if so, whether the language of the definition should be modified. Roughly 20 market participants, including Merrill Lynch, Morgan Stanley Dean Witter, and Abbey National Bank, aired their views at the December meeting in London and New York. A general discussion followed.

One of the difficulties in managing equity and foreign exchange barrier option books is handling potentially unstable gamma positions when the spot is near the barrier and/or the option near expiry. The figures below illustrate such an example using a down-and-out put. The option matures in one month, is struck at-the-money, and has a barrier at 80% of the strike. The top figure plots the option price versus spot and the large curvature near the barrier indicates a large gamma. This is clearly seen in the lower figure, which illustrates the corresponding gamma. The gamma profile near the barrier is quite unstable and the delta hedge will be inefficient and often costly. This is one of the main barrier risks. One technique to manage such risks is to use exponential soft barriers.

A new regulation in South Africa likely to come into effect at the end of March is expected triple the volume of securitizations and synthetic securitizations, which will in turn boost the over-the-counter derivatives market. Gill Raine, head of financial engineering at Rand Merchant Bank in Johannesburg, expects the number of securitizations to rise to 30-40 a year from about 10. "This could open a whole new world for over-the-counter derivatives," according to Bruce Stewart, chief derivatives dealer at South African bank Nedcor Bank in Johannesburg. Structuring securitizations requires fixed income derivatives, and the market should be boosted as a result. He said there is no doubt that volumes will increase but thinks that the demand for synthetic securitizations might not take off as quickly because investors will have to get comfortable with the products.

Traders bought one- and two-month 25-delta out-of-the-money Aussie dollar puts against the U.S. dollar last week, betting that the currency would weaken. One-month implied volatility stood at 14.3%/14.6% at the close of trading on Thursday. Risk reversals favored puts over calls by 0.4%. The Aussie dollar was expected to weaken against the U.S. dollar because of weaker-than-expected Australia Bureau of Statistics unemployment data published on Thursday. Although employment figures improved, full-time employment had actually fallen, representing an actual weakening in the labor market, said a trader. Traders also expect one-month implied volatility to rise if the Aussie dollar falls further, making buying puts more attractive still, the trader said. On Thursday the spot stood at AUD0.5552 compared with AUD0.5565 the previous Thursday, he said. Most trades were interbank and speculative, he said. Typical notional sizes were AUD50 million.

Traders sold at-the-money Thai baht straddles against the U.S. dollar last week in a bid to offload falling implied volatility. One-month implied volatility had dropped by Tuesday to 9.5%/10.5%, from about 10.5%/11.5% the previous Friday, said a trader in Singapore. Vol fell after Thai general elections over the week-end proved to be peaceful. The spot market was similarly assuaged. Traders, led by a few large U.S. banks, were mainly selling one-month volatility on Monday. By Tuesday the selling was frenzied in maturities out to a year. Similar trading patterns were evident in the Taiwan dollar and Korean won against the U.S. dollar, as these currencies tend to move together, he said. The spot stood at THB43.10 on Tuesday, compared to THB42.15 just before the Thai elections, said the trader. Most plays were likely speculative, he said. Notionals averaged USD5-20 million, he said.

Abbey National Asset Managers is considering making its debut in the hedge fund market with the launch of three funds that will user over-the-counter derivatives. The funds would likely each launch with some GBP100-150 million (USD149-223 million) in assets. It would launch the funds only if they each could be expected to grow to USD750 million within three years. "We're not doing this to playact," said Scott Jamieson, head of strategy in Glasgow. The board of directors must still grant approval, and the decision will include factors such as whether hedge funds fit the risk levels Abbey National is comfortable with. The timing of this decision is not certain, but will likely be in the next several months. If approved, the fund strategies will include a leveraged currency fund, a global macro fund—"That's a euphemism for, ‘we can invest in anything we want,'" Jamieson quipped—and an unleveraged European long-short market neutral equity fund.

Taiwan's Securities and Futures Commission is gearing up to allow local securities houses to market interest-rate swaps for the first time within a couple of months. The move is welcomed by Taiwan's two largest securities houses, Yuan Ta Securities Co. and Grand Cathay Securities Co., which are keen to become market makers in the product, leveraging off their corporate business. Currently only foreign and local banks are allowed to offer interest-rate swaps. An official at the SFC in Taipei said it wanted to help develop and deepen the local bond market and to help local securities houses compete better with foreign banks, which dominate the interest-rate swap market. The SFC is also responding to lobbying by securities houses which have repeatedly pressed it to give them approval. He declined to comment further on the timing of the move. Senior SFC officials are now on the verge of signing proposals on how the market could be regulated, he said, declining to elaborate. They were drawn up by the SFC's over-the-counter derivatives department.