Search results for

BNP Paribas is planning this summer to set up a weather derivatives desk in New York. Denis Autier, head of global risk solutions in London, said the bank already trades weather contracts from Europe but wants to have a physical presence in the U.S. The bank set up its weather derivatives operation in May. It first traded weather from Europe because its insurance risk team is based there. Autier said the head of the department and headcount have not been finalized yet. The desk will also deal with other alternative risk transfer products, such as insurance-related products.

Credit Lyonnais has hired Tony Wong, a foreign exchange sales professional at BNP Paribas in Hong Kong, to the new position of v.p. interest-rate derivatives sales and marketing for Hong Kong. Wong starts today and reports to Frédéric Truchot, head of derivatives sales in Hong Kong, according to Frédéric Lainé, Asia regional manager, interest-rate derivatives products in Hong Kong. The hire expands the bank's Hong Kong interest-rate sales and marketing team to three, he noted. Credit Lyonnais has been planning to expand its Hong Kong interest-rate derivatives team for some time to take advantage of growth in Asia's interest-rate market, Lainé said. Further hires are possible by the second quarter or second half, provided the market continues to grow, he continued.

Credit Suisse First Boston is recommending that clients buy one-year dollar puts against a basket of currencies containing euro, Swiss franc, sterling, Australian, Canadian and New Zealand dollars. Kevin Chang, foreign exchange strategist in London, said it is recommending this trade because the bank expects the dollar to depreciate against the basket of currencies as the U.S. economy slows down. National Association of Purchasing Management manufacturing survey data released last week suggests the weakening is likely to continue, as the economy slows and interest rates fall. CSFB is pitching the strategy with a maturity of between six months and one year because it believes there is room for a short-term correction in the dollar's recent weakening against the euro. CSFB forecasts euro/dollar at above parity, dollar/Swiss franc at CHF1.56, cable at USD1.45, dollar/Aussie at USD0.60, dollar/Canada at CAD1.45 and dollar/New Zealand at USD0.48 in 12-months.

Forward rates are derived from the interest rate swaps curve and represent the cost of borrowing the currency for six months at a future date represented by the maturity on the horizontal axis. Implied vols are derived from cap prices. Data supplied by Chase Manhattan Bank and Chase Securities.

Introduction

European insurance companies and pension funds were last week snapping up multi-callable notes to boost yields in anticipation of a further round of interest rate cuts. Deutsche Bank, J.P. Morgan and Morgan Stanley Dean Witter are heavily involved in structuring and marketing the notes. Multi-callable notes are attractive in a falling interest-rate environment because they pay a juiced-up yield. In return investors run the risk that the issuer will call the bonds. "It will be a frantic year for these products as insurance companies position themselves for a low interest-rate environment," said a derivatives professional at Crédit Agricole Indosuez. An interest-rate derivatives trader at a German bank in Frankfurt estimated that volumes shot up to EUR300 million (USD285 million) in the last week from a third of that at the end of last year.

Iccrea Banca has bought a one-year EUR1.4 million (USD1.3 million) knock-in put on shares of Mediaset to structure a reverse convertible linked to shares in the Italian television company. Banca di Credito Cooperativo bought the reverse convertible. Francesco Polimeni, head of derivatives trading at Iccrea Banca, said the put is struck at EUR14.14, the stock's closing price on Dec. 11, and knocks in at EUR11.31, or 80% of the strike level. The coupon is 10.20%. Polimeni said BCC asked Iccrea Banca to link the reverse convertible to Mediaset. This was probably because BCC wanted exposure to this company and with relatively high one-year volatility on shares in Mediaset, selling puts offered an attractive coupon, according to Polimeni. He added that it may have wanted exposure to the company now because its loans to Mediaset had expired.

Asahi Mutual Life Insurance, one of Japan's largest insurers, plans this year to significantly increase its JPY100 billion (USD872 million) equity derivatives book in order to reduce by more than one third its JPY2 trillion equity holdings over the next couple of years. The insurer expects the Nikkei-225 to trade in a narrow range around 14,000 this year, and so believes it can make money by selling calls struck at the top end of the range and selling puts struck at the lower end, while selling stocks in the cash markets, said Yasuhiko Sato, manager, equity investments department in Tokyo.

Wall Street firms, including Salomon Smith Barney and Banc of America Securities, are recommending customers sell short-dated single-stock implied volatility to take advantage of the Nasdaq Stock Market's roller coaster ride and the Federal Reserve's surprise 50 basis point interest rate cut last week. Leon Gross, managing director and head of global equity derivatives research at Salomon Smith Barney in New York, suggested selling short-dated calls on new economy stocks, such as Cisco Systems and CMGI, and buying longer-dated calls, after short-dated vol spiked dramatically Wednesday. Salomon is pitching the trade mainly to hedge funds in notional sizes of about USD10 million. In a typical trade a customer might sell three-month Cisco options struck at-the-money with implied vol of 80%, and buy one-year options struck at-the-money with implied vol of 62%. The customer wins if the downward slope on term structures flattens in the near term. By changing the ratio of long options to short options, the investor can instead take a view that implied volatility on the longer-dated position will be higher when the short position expires than the forward vol is now. In this particular example, the ratio of the notional sizes of the options could be 1:2.

Several former Exelon Power Team energy derivatives structurers are launching what they believe will be among the first energy derivatives hedge funds. The fund, to be called GingerBread Man Partners, will begin by trading liquid exchange-traded options, such as natural gas and heating oil contracts on the New York Mercantile Exchange. Once it grows to about USD10 million under management, it will be able to trade off-exchange exotics, for example, best-of options and spark spread options, as well as more standardized over-the-counter products, said Tamir Druz, partner and managing director in Philadelphia. A spark spread option would allow the fund to take a view on the price of power versus the heat-rate-adjusted price of fuel. The fund is looking to take advantage of pricing inefficiencies in the energy options markets. For example, the market is struggling with how to model electric power derivatives, said Druz. Prices for power in a power pool can routinely spike in a summer, then revert to a mean level—behavior that many players' models cannot account for or predict. Many players work off the Black 1976 model, or modified versions of it. These models assume power prices move according to geometric Brownian motion, or randomly. The initials in geometric Brownian motion, or GBM, helped inspire the name of the fund, GingerBread Man. The name is also a reference to the elusive children's book character.

Prebon Marshall Yamane has started brokering listed equity derivatives. Nicholas Ruddell, divisional managing director fixed income and securities in London, said the broker wants to offer these products in order to be a one-stop shop. Prebon already brokers over-the-counter transactions, which tend to be longer-dated, but many players use listed derivatives in shorter-dated transactions because they can more easily mark them to market and there is no counterparty risk. Prebon has been trying to broker trades on the London International Financial Futures and Options Exchange since the middle of last year when the bulk of equity products moved to screen trading, according to Ruddell. Screen trading made brokering listed products more attractive to Prebon because less infrastructure was required to start trading on the exchange.