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Energy supplier Centrica has entered an interest-rate swap to convert half a recent fixed-rate bond offering to a floating-rate liability. Tony Kendall, group treasurer in Windsor, U.K., said the company entered a fixed-to-floating swap on the back of its recent GBP100 million (USD145 million) bond sale. The owner of British Gas converted GBP50 million into a floating-rate liability and will retain the remaining GBP50 million in fixed-rate exposure. "Our policy is to have 50/50 in fixed and floating," he said, adding the company issued the four-year deal in fixed because investors prefer fixed-rate paper.

Houston-based Lyondell Chemical Co., a manufacturer and marketer of basic chemicals and polymers, is considering entering an interest-rate swap to convert a seven-year USD393 million fixed-rate bond it issued in late November into a synthetic floating-rate liability, according to a company official. The chemical company is looking to enter a swap in which it receives a fixed rate equal to the 9.50% coupon on the bond and pays a floating rate.

Derivatives houses sold at least EUR5 billion (USD4.5 billion) worth of one-month euro calls/U.S. dollar puts last week as traders unloaded out-of-the-money options in preparation for what is expected to be a listless last week of the year in the foreign exchange market. Sales of euro calls with strikes at USD0.91-0.92 were most prevalent, according to one trader. "Everyone is selling time decay--people they don't think it is valuable to own the one-month over Christmas, which it isn't, because the fx markets historically don't move much over that time," he said. Spot was at USD0.8990 Wednesday. One-month euro/dollar implied volatility sank as a result of the selling, falling to 8.8% Wednesday from 9.4% at the start of the week. Traders predicted vol will go lower before the new year after which it is expected to recover.

Entergy-Koch Trading plans to set up a tradable precipitation index to replace the index Enron Nordic Energy established in September. John Polasek, v.p. of Entergy-Koch Trading in Houston, agreed that the Scandinavian precipitation index, or SPI, is the most widely used index and said the firm is looking at creating its own version to replace it after Enron's failure. He said any Entergy-Koch version would also likely be an open model to allow others to trade on it, because "an open index leads to greater liquidity and that is better for all of us."

GlaxoSmithKline, the pharmaceutical company, may enter a swap to hedge the interest-rate risk on a GBP1 billion (USD1.46 billion) fixed-rate bond it recently offered. In the swap the company would look to receive the coupon on the bond, 5.25%, and pay a LIBOR-based floating rate. Sarah-Jane Chilver-Stainer, group treasurer in London, said GSK sold the 30-year bonds with a fixed coupon because it was attracted by the rate. Credit Suisse First Boston and Schroder Salomon Smith Barney led the deal. It will keep the proceeds in sterling, which Chilver-Stainer called the company's natural currency. She declined comment on the rate it would look to pay and the maturity.

Fund managers and analysts are expecting a wave of onshore long/short equity hedge funds to be launched in Italy next year, to the tune of at least EUR3 billion (USD2.7 billion), which is likely to lead to increased demand for over-the-counter equity derivatives. Alternatives manager Kairos Partners, with EUR1.5 billion under management, has applied to the Banca di Italia for permission to launch Italy's first onshore single-strategy fund. The fund would use OTC derivatives to buy and sell stocks, for example it would buy put options as a way to short stocks, said Guido Brera, risk manager in Milan. He expects the fund will receive approval and be launched within three months. Brera said the fund will probably have around EUR550 million under management.

ING Investment Management Asia Pacific (Hong Kong) , with USD32 billion under management, is considering expanding its fixed-income portfolio to include purchasing and selling credit-default swaps for the first time next year.

Hartford Investment Management, a money manager with USD171 billion in assets, is working with Morgan Stanley as its exclusive counterparty as it prepares to pull the trigger on its first credit derivative. An official at the money manager in Hartford, Conn., said it chose Morgan Stanley because it had offered the best advise throughout the process. The money manager spoke to all the major players, including Lehman Brothers, Merrill Lynch, Deutsche Bank and Goldman Sachs, the official added.

Government-owned Korea Development Bank is planning to become the first domestic bank to offer structured credit products as well as trade credit-default swaps to take advantage of the growing hunger for credit risk in Korea. H.G. Chung, head of financial engineering in Seoul, said the bank is looking to tap the growing interest in the products in Korea, as well as reduce credit risk on KDB's balance sheet through offering synthetic CDOs. Chung continued that the bank will target insurance companies as well as pension funds. The size of the initial synthetic CDO will likely be at least USD100 million.

Morgan Stanley has created an index of 35 corporate bonds to allow investors to both take on and shed corporate credit risk through investing in the index or entering total return swaps, according to Steven Zamsky, managing director and credit strategist in New York. The firm plans to begin trading calls and puts on the index, dubbed TRACERS, by early next year. "There is a lot of two-way demand and an incredible amount of trading volume," according to Zamsky. Since the inception of the index, a month ago, more than USD4 billion has been traded on the index.

Roulette wheels have been adding value to casino owners in Monte Carlo for hundreds of years, but more recently the mathematical technique named after that city--also used in quantum physics and atomic bomb research--has found a valuable application in finance. This Learning Curve looks at one simple application of Monte Carlo analysis to calculate the risk that LIBOR will exceed a set level in a given period of time. This allows the risk of a floating-rate investment to be quantified and helps to answer questions such as:

Schroder Salomon Smith Barney is looking to add one or two credit derivatives traders in London to meet increasing deal flow. Iftikhar Ali, head of the four-person default swap trading desk in London, said he plans to build the team because he expects this year's unprecedented growth and volatility in the credit derivatives market to continue next year as more end users and banks enter the market. He also predicts a healthy pipeline in the European cash bond market in the first quarter, which will lead to greater demand for protection.