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Collateralized debt obligation investors are asking dealers to structure synthetic CDOs in which managers can use credit-default swaps to hedge positions or lock in profits, which can then be used to add credit support to the transaction, typically called a short bucket. James Hart, portfolio manager at ZAIS Group Investment Advisors in Dublin, with over USD3.5 billion under management, said he would be more likely to buy a CDO tranche with this facility because it protects the portfolio against credit deterioration.

The ongoing debate over the definition of restructuring as a credit event has edged closer to all-out confrontation with the circulation last week of a draft supplement by the International Swaps and Derivatives Association and the increasing probability that an argument over Xerox's restructuring will end up in court. The ISDA draft has raised the hackles of a group of major insurers who believe the association has crawfished out of providing a workable definition of restructuring, according to industry officials. Stacey Carey, policy director at ISDA, said the committees continue to debate all the issues surrounding restructuring.

Credit Suisse First Boston has hired Rex Ma, structurer in the fixed income group at Morgan Stanley in Hong Kong, as a director in its emerging markets structuring group in Hong Kong. Carl Bautista, managing director of the emerging markets structuring group, said Ma is a replacement for Boon Yong Leo who left several months ago. Leo could not be reached for comment and his whereabouts could not be determined by press time.

Deutsche Bank plans to launch its first structured product based on the iBoxx index within the next two weeks. iBoxx is a European fixed-income index jointly compiled by seven market makers to provide transparent pricing of investment-grade corporate bonds. The five-year note will synthetically replicate the weightings of the entire corporate portion of the iBoxx index, which includes around 450 names, according to an official at Deutsche Bank.

Credit-default protection on Ford Motor Credit widened as much as 10% last week before paring its losses, after the U.S. auto maker said August sales rose more slowly than those of its two main competitors. Midmarket five-year default swaps on the financing entity of Ford widened 40 basis points Wednesday after the parent reported that morning that its U.S. sales rose just 12% during August. Compared to a 24% rise for DaimlerChrysler's U.S. operations and an 18% gain for General Motors, traders said the numbers didn't bode well for Ford.

Deutsche Bank, Schroder Salomon Smith Barney and UBS Warburg are pitching swaption trades that take advantage of the high levels of volatility across the swaps curve in Europe and the U.S. Deutsche Bank is recommending selling euro and U.S. swaptions, in which the investor pays fixed and receives floating. This is because the forward curve is predicting higher rates, while Deutsche Bank predicts rates will remain low, according to George Cooper, global fixed income strategist in London. Specifically, the firm is recommending selling a one-year option to enter five-year swaps or five-year options to enter five-year swaps in both the euro and U.S.

Salomon Smith Barney Australia started marketing today the first capital guaranteed product in Australia linked to Asian indices that allows investors to lock-in quarterly gains without downside exposure, according to Luke Randell, managing director of trading and derivatives in Sydney. "It's the first capture-the-peaks market-linked investment of its kind in Australia," proclaimed Randell, adding, "We plan to launch additional products linked to a range of indices as well as individual domestic stocks."

Dexia Municipal Agency, a French public sector financing agency, has entered an interest rate swap on a recent EUR1 billion (USD982 million) bond offering. In the swap, Dexia is receiving the fixed rate on the bond--4.25%--and paying Euribor plus a spread, said Véronique Hugues, funding manager in Paris. Hugues said Dexia entered the swap because it prefers to avoid interest rate risk by maintaining floating-rate exposure on its debt portfolio.

Pacific Asset Management, a Singapore-based fund manager with USD65 million in assets, is gearing up to start trading credit derivatives for the first time by year end. "Credit derivatives will allow us to increase our flexibility," said Desmond Soon, investment manager in the Lion City. He continued that the fund manager is looking to both purchase and write credit protection for its fixed-income portfolio and that the notional size could reach over USD50 million.

Credit Lyonnais has hired Ken Chan, interest rate options trader at Bank of America in Hong Kong, in a similar role for its Hong Kong desk, according to Frédéric Lainé, Asian head of fixed income and derivatives in Hong Kong. He declined further comment.

This is the first in a two part series that demonstrates how the short-term view of day traders can contribute to the formation of a market bubble. This week's article focuses on risk and return in neoclassical finance and next week's looks at risk and return in intrinsic time.