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This Learning Curve will focus on the empirical application of option replication rather than the theoretical foundation. We restrict ourselves to the foreign exchange markets where transaction costs are low and liquidity high. These two factors are indeed the necessary conditions for the use, if at all, of dynamic strategies.

U.K. mobile operator mm02 has entered a cross-currency interest-rate swap to convert a fixed-rate euro-denominated liability into a floating-rate sterling denominated one. Anthony Lawrinson, group treasurer in London, said the company converted half of a EUR1 billion (USD884 million) bond it sold earlier this month into a floating sterling liability. It also entered a plain-vanilla interest-rate swap to convert the remaining EUR500 million into floating euros. At the same time, the company also issued a fixed 10-year GBP375 million (USD536 million) bond, for which it will not enter a swap.

BNP Paribas plans to hire up to 20 foreign exchange marketers with knowledge of over-the-counter derivatives as part of the firm's effort to offer more structured fx products to generate higher margins in a commoditized plain-vanilla market. Ligia Torres, head of fx sales in Paris, said, "we are concerned that fx is becoming a commodity and we are trying to find a solution," adding, "we are trying to recruit people with a strong background in derivatives."

Nikko Salomon Smith Barney is planning to double its credit derivatives desk in Tokyo within the next six months amid growing client interest, in part driven by the weakening credit environment. The firm plans to hire two or three traders and the same number of structurers, according to an official in Tokyo. "It's in the game plan," he quipped.

U.K. sandwich chain Pret A Manger may increase its use of foreign exchange swaps to hedge currency exposure as the company opens more stores around the globe and more of its revenues are non-sterling. John Clarck, finance director in London, said the company has opened a handful of take-out stores in New York and Hong Kong recently and "we probably will use a bit more [fx swaps] in the future because we are developing overseas."

UBS Warburg plans to set up a cross-rates business in Stamford, Conn. and London as part of a move to increase its distribution of interest-rate derivatives. Rafael Geys, managing director and global head of fixed income derivatives marketing and structuring in London, said the cross-rates business would offer a package of risks made up of swaps, agencies and government bonds that can be traded and sold from a single desk. Currently UBS clients have to call separate desks to trade each asset class, but the new desk will give them one point of call and allow them to reallocate their positions more quickly, Geys said.

Dresdner RCM Global Investors will add European telecoms and industrials to its £120 million sterling-denominated credit portfolio. Jamie Stuttard, London-based portfolio manager, says Dresdner will add new issues from France Telecom, which he expects will come with a deal with a sterling tranche this year, if it features a coupon step-up to protect investors from a ratings downgrade. He will add KPN's 81Ž4% of '08, because he views the company as a huge recovery story.

Prescott Crocker, a high-yield portfolio manager with Boston-based Evergreen Investment Management, says he will increase the firm's cyclical bond allocation by $22.5 million, or 5%, based on the assumption that an economic recovery is underway, as indicated by improved commodity prices. He will finance reducing defensive names by $13.5 million, or 3%--as well as energy bonds, by $9 million, or 2%. The manager will buy bonds at a minimum spread of 650 basis points over the curve, while selling at spreads tighter than 450 basis points. Most of the sales will be double-B rated bonds while the buys will target single-B paper. The rotation is duration neutral.

Indiana Farm Bureau Insurance will look to swap out of financials into triple-B utilities on the view that utilities are oversold as a result of Enron-related worries. Bradford Barklay, portfolio manager of $1 billion in taxable fixed-income, says he will look at triple-B names because he does not want to take a large gamble on the sector. He will look to add to holdings of Dayton Power & Light's 6.875% of '11 (Baa1/BBB). Barklay says he likes the company because it is conservatively managed, and, although it is a bit more highly leveraged than other utilities, it had an attractive yield of 205 basis points over Treasuries on Jan. 8. To finance the trade, the insurer will likely sell a five-year Bear Stearns commercial mortgage obligation originated by GE Capital with a 5.06% coupon. Barklay says he will sell the bonds because he believes the three- to five-year area of the curve is vulnerable to underperformance because it did very well in 2001.

Sore sports ... Bank of America, sponsor of the Winter Olympics, is trotting out its employees in televised spots that feature earnest staffers giving their best in skiing and speed skating events. Giving their all, the B of Aers take "Agony of Defeat"-type spills throughout the course but live the dream that is Olympic competition. Still, the painful wipeouts pale in comparison to the grueling endeavor of moving pro rata paper through the market.

This chart, provided by Citibank/Salomon Smith Barney Inc., tracks bid-ask prices for par credit facilities that trade in the secondary market. It also tracks facility amounts, ratings, pricing and maturities.