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The New Zealand Debt Management Office, which runs a NZD37.2 billion (USD14 billion) debt portfolio on behalf of the government, is looking to increase its use of cross-currency interest-rate swaps this year on the back of expanding its euro medium term note program, according to Phillip Anderson, treasurer in Wellington. "We'll borrow somewhere in the range of NZD500 million to NZD1 billion this year," said Anderson. Of the NZD37.2 billion debt portfolio, NZD7.9 billion is denominated in foreign currencies.

Equity derivative marketers in Japan believe in the coming weeks there will be a surge in demand for structured notes embedded with barrier options linked to the performance of the Nikkei 225. The value of transactions could swell to JPY20-30 billion (USD149-224 million) as Japanese retail clients rush to pick up yield before the fiscal year closes at the end of March. "This will likely accelerate in the next couple of weeks," said an equity derivatives marketer in Tokyo. There is currently about JPY37.5 billion of Nikkei-linked notes in the market, of which many were structured in October after the Nikkei bounced back from September lows around the 9,600 level. The index climbed to 11,000 by November.

The failure of Kmart Corp. has spurred Cardinal Health, the largest U.S. supplier of health care products to the retail industry--supplying pharmaceuticals to about 1,600 Kmart stores--to step up its interest in using credit derivatives for the first time. "These guys have looked at buying protection before, but the Kmart blowup has forced them to double their focus," according to a market official familiar with the company's plans. Richard Miller, cfo in Dublin, Ohio, did not return calls by press time. Lisa Kim, a company spokeswoman, was unable to provide a comment by press time.

Raymond Wong, managing director of global equity markets at Merrill Lynch in Hong Kong, relocated to Tokyo two weeks ago in a similar position handling equity derivatives trading and structuring for the Japanese market. Wong confirmed the move, declining further comment. He is thought to be replacing Ajay Soni, who has taken a new role in London (see story, page 1). James Rodríguez de Castro, managing director of global equity markets in Hong Kong, will assume Wong's responsibilities in addition to his own. De Castro declined comment.

Eddie Tam, director of equity derivatives sales at Credit Lyonnais in Hong Kong, resigned last Tuesday for what he attributed to personal reasons. "I'm looking for a new challenge." Tam, a seven-year veteran of Lyonnais who previously worked at Merrill Lynch in New York and Hong Kong, said he plans to take time off from the industry and do some traveling.

Merrill Lynch is forming a proprietary equity-linked trading group that will be spun off from its convertible bond group. The new effort, named the Strategic Risk Allocation Group, will take positions in over-the-counter equity derivatives and equity-linked notes, according to Olivier Deloire, head of European equity-linked trading in London. The move is regarded as a major departure for Merrill, since the firm has historically been risk averse, said rivals.

Merrill Lynch has started producing a dedicated credit derivatives research product to meet increasing end-user demand for synthetic credit exposure. Chris Francis, head of European and Asian credit research--who is now responsible for credit derivatives research--said the move marks the first time Merrill is regularly pitching default swaps as an investable asset class to clients. "Before we used to do it occasionally when we did a big piece on credit strategy, but a lot more clients are getting involved in the market and a lot more are looking to get involved."

Currency options professionals last week pinned the blame for the USD750 million in fx losses rung up by a rogue trader at Allied Irish Bank subsidiary Allfirst to weak risk controls. "I think the bank's systems of controls are atrocious," one trader said. "At most major money banks, if you don't get confirmation for a trade in two days their pit bulls are all over you." If the firm had used a random confirmation technique it should have realized something was amiss much earlier. "The amount of trades put on to lose that much had to be phenomenal. I don't know how they could have missed it," he added. Officials at Allfirst did not return calls.

Salomon Smith Barney is preparing to market a synthetic collaterlized debt obligation referenced to a USD1 billion pool of investment-grade bonds that is expected to come to market by March. Los Angeles-based Trust Company of the West (TCW) will actively manage the CDO, which has been named Craigey Street. "They've managed a couple of our cash deals in the past. TCW has a very strong investment-grade team," said a Salomon official. He declined to provide further details on past deals. Officials at TCW did not return calls before press time.

Five-year credit protection on Rolls-Royce blew out by roughly 70 basis points last week amid concerns over the U.K. company's amount of off-balance sheet debt as so-called Enronitis--skepticism over companies' accounting standards--swept the financial markets. Spreads on Rolls-Royce widened from around 135-155 basis points at the start of the week to 200-220 bps by Thursday. "There's a lot of nervousness everywhere and now you are starting to have real issues with the fundamentals and there's not a lot of confidence in some of the accounting out there," said one trader. An equity research report Goldman Sachs published Wednesday, which questioned the size of Rolls-Royce' on and off balance sheet debts, caused investors to hit the panic button and buy protection in droves. Goldman officials responsible for the report did not return calls.

Those who trade equity derivatives for a living are familiar with the complexities of trading volatility. In general, traders seek to exploit option mispricings through delta-neutral strategies in which a hedge position in the underlying stock is dynamically adjusted through the life of the option. While the Black-Scholes framework provides a straight forward formula with regard to initiating (delta) and adjusting (gamma) the stock hedge, the process of realizing profits from volatility trading is far from exact. Profit uncertainty arises from the path dependent nature of an option's gamma and vega. These Greeks are a complex function of the relationship of the spot price to the strike price, time, and volatility.

John Kapustiak, head of U.S. interest rate options trading and U.S. rates proprietary trading at Bank of America in Chicago, has been promoted to global head of rates derivatives trading in Chicago.