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Five-year protection on Italian carmaker Fiat widened by about 30 basis points last week on the back of the company's USD2.2 billion convertible bond offering, as convertible arbitrage hedge funds flocked to the credit-default swap market to strip out credit risk. Fiat spreads widened to 160bps Wednesday from 130bps at the start of the week. One trader noted the spreads temporarily tightened Wednesday morning in London to 140bps, only to widen Wednesday afternoon when U.S.-based hedge funds sought protection as part of the convertible deal. "The convertible players are looking to hedge the convertible with credit-default swaps to arbitrage out the equity option," said one trader in London, adding the spreads widened back out again in the afternoon in London when the U.S. market was open. "They are more powerful than the European hedge funds," he noted.

Mumbai-based SBI Funds Management, with USD800 million under management, is planning to pull the trigger on its first rupee interest-rate derivative next year. Sarvana Kumar, head of fixed income in Mumbai, said the fund manager is looking to enter an interest-rate swap to convert a portion of its USD500 million fixed-rate bond portfolio into floating. He declined to estimate how much of the portfolio it would convert. It is planning the move because it expects interest rates to rise, possibly by 50 to 100 basis points, next year.

Speculation that Japanese policy markers are contemplating printing more yen to combat the country's spiraling deflation caused a surge in demand for yen puts/dollar calls last week. As a result one month yen/U.S. dollar implied volatility rose to 10.10% Wednesday from 8.5% a week earlier, according to New York-based traders. Spot rose to JPY126.50 last Wednesday from JPY125 a week prior.

The International Swaps and Derivatives Association is looking to overhaul its 1992 master agreement as well as update credit and equity derivatives definitions for next year. The initiative is part of an ongoing effort to update ISDA documentation, which is used in the majority of over-the-counter transactions.

Japan's Hiroshima Bank, with over USD44 billion in assets, is looking to invest in credit derivatives such as credit-linked notes and synthetic collateralized debt obligations. "We're now studying this," said Masakai Monden, manager of the investment department in Tokyo. He continued that the bank will likely invest in up to two or three synthetic CDOs next year, in increments of between USD10-40 million. "We'll look at it on a case by case basis," he explained. Hiroshima Bank will prefer a CDO structured on Japanese credits as it is more familiar with the companies.

KBC Asset Management, with EUR60 billion (USD53 billion) of assets under management, is structuring a capital-guaranteed product with an embedded lookback option, as European retail investors look for conservative investment products. Lode Roose, product development manager in Brussels, said the asset manager is structuring nine-year notes based on an underlying basket of 20 European and U.S. value stocks. The notes are 100% capital guaranteed and give investors 110% of the basket's gains.

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 next year to take advantage of a growing hunger for credit risk in Korea. H.G. Chung, head of the financial engineering team in Seoul, said the bank is looking to tap the growing interest for the products in Korea, as well as reduce credit risk on KDB's balance sheet through offering synthetic balance sheet 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.

Tom Ku, head of quantitative strategies at Greenwich, Conn.-based investment management company Paloma Partners, with USD2 billion in assets, is planning to leave early next year to launch a convertible bond arbitrage fund. Ku, who is responsible for developing convertible arbitrage strategies for Paloma Partners, said his hedge fund will use interest-rate swaps and credit-default swaps.

Credit Lyonnais is planning to bulk up its interest-rate and credit derivatives desk in Hong Kong in the coming months. "Year-end is a good time to complete the extension of our desks," said Frédéric Lainé, Asian head of fixed-income and derivatives, adding that it plans to complete its hiring process for next year in two months. The new recruits will report to Lainé.

A number of Wall Street firms, led by Merrill Lynch, are looking at creating the first synthetic securitizations in which life insurers hedge out the risk that policy holders die prematurely. A Merrill official said it is looking at the asset class and would aim to complete a deal in the summer if it can iron out potential pitfalls. The main problem is creating a structure that transfers the risk and is transparent and simple enough for investors to understand, the official said. Mitchell Lench, co-head of structured finance at Fitch in London, said the rating agency has been approached by a couple of investment banks about structuring securitizations on life insurance assets, but he declined to name the firms.

San Francisco-based Montgomery Asset Management, an investment firm with more than USD7 billion in global assets, plans to beef up its sales team from six to 11 professionals over the next six months, said Bill Santos, managing director. The sales team will market single hedge fund strategies, including convertible arbitrage strategies, which use credit-default swaps, interest-rate swaps and equity derivatives, and fund of funds. The move coincides with the launch of an absolute return fund of hedge funds called the Montgomery Partners Series last week.

Merrill Lynch's head of global emerging markets, George Handjinicolaou, who was responsible for foreign exchange, fixed income and credit derivatives, has left the firm. Handjinicolaou said he left late last month because of differences in opinion with the new management over business philosophy. He declined to elaborate. His responsibilities have been assumed by David Lund, head of global credit trading. Lund could not be reached for comment. Jessica Oppenheim, a Merrill spokeswoman, declined comment.