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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.

Traders in Asia believe that a domestic treasury bond futures market to be launched in Thailand within nine to 12 months will result in a dramatic increase in the use of OTC interest-rate derivatives.

Royal Bank of Scotland Financial Markets is planning to hire five derivatives salesman for its London office to focus on selling derivative-linked products to end users on the Continent. Chris Webster, head of derivatives sales in London, said he plans to expand the 27-strong team to 32 sales professionals. The mainly interest-rate derivatives sales force will cover the U.K. and Europe. Webster said the expansion is in line with the bank's goal to do more business on the Continent. Although he acknowledged the interest-rate derivatives market is saturated, he said RBOS is still hoping to make inroads. "The market is developed, but our coverage of it isn't."

UBS Warburg has created a capital guaranteed note on the DAX and Euro Stoxx 50 that offers more upside potential than traditional structured products and is being aimed at investors who are turning bullish on equity markets. The one-year certificates will offer higher participation than most guaranteed notes, but in turn also have the potential for a 100% wipeout, said Martin Boldt-Christmas, equity derivatives analyst in London.

Taylor Woodrow, a FTSE 250 housing and construction developer, is considering entering its first interest-rate swap to convert part of a GBP250 million (USD356 million) 6.78% 10-year bond into a synthetic floater. Adrian Auer, group finance director in London, said the company is reviewing some interest-rate structures to determine whether it makes sense to hedge the rate risk on the offering. The deal was priced last month. "We will probably use interest-rate derivatives to get the balance right," he said. The company may enter a swap now because this bond offering was its first in more than a decade.

One-month implied volatility for Japanese yen/dollar options rose only slightly to 10.5% Wednesday, up from about 9.8% a week earlier, as demand for at-the-money yen calls/dollar puts, saw a slight increase. The one-month 25-delta risk reversal inched further in favor of yen calls/dollar puts. Traders reported that activity in the options markets was slow last week because investors were wary of the volatile spot market. "Spot has been whipping around all week. It's very choppy. Most investors are staying out," said one trader. Spot was trading at JPY133.65 last Wednesday.

Taplin, Canida & Habacht will swap out of short-term Treasuries into corporates on the view that the Enron-related worries have caused corporate spreads to widen more than justified, and that Treasury prices are going to decline with the improved economy. Bill Canida, portfolio manager with the Miami-based shop, says he will wait for 30-year auto sector corporate bonds, such as Ford Motor Corp., to reach a 300 basis points spread over Treasuries before moving. As of last Monday, those spreads ranged between 270 and 280 basis points. He declined to specify exactly how much he would move.

Betting, and losing... again. In the wake of revelations that an Allied Irish Bank subsidiary was dealing with a $750 million fraud in its foreign exchange department, The Sun reports that rogue trader Nick Leeson, who brought down the historic Barings Bank through fraudulent futures contracts, was heard to have bet someone recently it could never happen again. Hopefully, this time he was betting with his own money.

The Deal Roll-off Chart, provided by Dealogic, lists the 50 largest leveraged credit facilities in the U.S. market that are due to mature in the coming month. It is designed to provide a look at potentially available money in the market as credits are renewed or retired.

Pioneer Investments, which manages EUR9 billion in European credit and government bonds, will add France Telecom and Deutsche Telekom step-up coupon bonds when the recent volatility in these securities decreases. On the back of recent uncertainty over potential downgrades, asset disposal programs and debt refinancing, these companies' bonds have widened 10-30 basis points, depending on name and maturity, says Raffaele Bertoni, portfolio manager. "It's difficult to predict the limit of the widening; it depends on the further news on asset disposals--for example, how France Telecom will finance Mobilcom debt," he adds. Once a clearer picture emerges, the firm will pick up shorter-dated step-up coupon bonds, he says. FT's 6.75% step-up of '08 was trading 155 basis points over swaps last Tuesday, while DT's 5.75% step-up of '06 was trading at about 115 over.