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Collateralized debt obligation houses including Bank of America, JPMorgan and Dresdner Kleinwort Wasserstein are working on creating a new market in options on CDOs. Tight spreads mean many investors are shying away from purchasing CDO tranches but still want exposure to the sector and bankers say options are the answer.

The DKK20 billion (GBP1.86 billion) Danish pension fund for lawyers and economists, the Juristernes og Økonomernes Pensionskasse (JØP), increased its synthetic equity exposure by some 3% to around 25% of assets, from the low 20s, by unwinding a short call position on the Standard & Poor's 500. Henrik Frank, cio in Copenhagen, said the pension fund wrote a call at the turn of the year with a strike around 1,000 and bought the option back on June 27. The option was due to mature in December. The S&P opened at 1,007.2 on Wednesday.

Major credit derivatives houses are reviewing their back office procedures because of the huge volumes of credit-default swaps needing to be settled on particular dates. Earlier this year the default swap market switched to quarterly roll dates, where trades mature and settle once a quarter, rather than when they are traded. This has resulted in firms, such as Deutsche Bank, processing an additional 12,000 payments on a single day each quarter, according to Keith Rake global head of derivatives operations at Deutsche Bank in London.

Deutsche Bank has hiredCraig Delaurier, convertible bond trader at Goldman Sachs in New York, for a similar role. Jeremy Howard, global head of Deutsche Bank's convertible bond flow business in New York, said the hire is part of the German firm's strategy to build its client facing convertibles business in both sales and trading. He added that part of Delaurier's role will be to execute convertible bond arbitrage trades. Further hires may be made, he added. Delaurier declined comment.

Philippe Hatstadt, former senior managing director and head of credit derivatives trading at Bear Stearns in New York, has resurfaced at Merrill Lynch, more than a year after leaving, as managing director and head of structured credit derivatives trading. Hatstadt, who declined comment, left Bear Stearns in February last year after the firm reorganized its credit derivatives division, according to one credit derivatives professional.

Popular derivative pricing theory begins with assumptions about perfect, frictionless markets. All markets, however, are illiquid to a certain extent. Individual buy orders tend to make prices rise and sell orders tend to make prices fall. Even where the size of an order is too small to change the bid-offer spread in a security, any market (non-limit) trade reduces both the remaining order depth and, as a result, the minimum size needed for the subsequent order to cause a change in price.

Credit-default swap spreads on Fiat widened from 585 basis points to 625-640bps last week after Moody's Investors Service downgraded the corporate to Ba3 from Ba1 on Monday. Most of the trading actively was executed by hedge funds with only a few asset managers entering the market to hedge their bond positions. Fiat's downgrade did not affect the rest of the auto sector because it is the only major

Goldman Sachs has set up a specialized structured credit trading desk in New York and has hired Will Roberts, former chief risk officer for equities at Credit Suisse First Boston, to head the initiative. Bruce Corwin, spokesman in New York, explained that the firm had previously organized its structured credit platform as part of its general credit derivatives business, but the business has grown to the point where increased specialization is required. Roberts did not return calls.

Last Updated on 7/11/03

Fortis Bank Hong Kong is considering establishing a credit derivatives desk in Hong Kong as part of its bulk up in fixed income. "We may start using this as a trading tool by the end of next year," said Philippe Dirckx, head of fixed income in Hong Kong.

Goldman Sachs plans to start offering equity derivatives on Chinese A shares after regulators gave it the green light to trade the underlying stocks last week. The renminbi-denominated A share market opened to qualified foreign investors last month, with Citigroup, Morgan Stanley, Nomura Securities and UBS receiving the first licenses (DW, 6/16). "It's an exciting first start, everyone knows this will be a huge business," said an official at Goldman. He added that while the firm was given permission to enter the market it is still discussing its initial investment quota with regulators, which may be up to USD300 million.

Xavier Mimaud, an index options trader at Goldman Sachs in New York who traded over-the-counter derivatives, has left the firm. It could not be determined whether Mimaud, who could not be reached, has joined a competitor. Ed Canaday, spokesman in New York, declined comment.