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An Australian and a U.S. energy company last week entered into what is believed to be the first weather derivative basket option based on four cities in Australia. The payout on the November to March contract, which covers the Australian summer, is capped at USD4 million and was brokered by United Weather in Jersey City, N.J. Philippe Chauvancy, director of United Weather Europe, said the basket option is based on Sydney, Melbourne, Brisbane and Adelaide. He declined to name the counterparties.

Deutsche Bank has hired Gohir Anwar, responsible for derivatives sales to U.K. insurance companies at BNP Paribas in London, and Kevin Corcoran, derivatives sales at Barclays Capital in London, as directors in its relative value group. Both will report to Marzio Keiling, head of the relative value group for northern Europe. Anwar and Corcoran will focus on structured credit product sales to U.K. banks and insurance companies, according to a spokeswoman. She said both of these positions are expansions and reflect Deutsche Bank's strategy to grow its U.K. credit business. She declined further comment. Anwar directed calls to press officers and Corcoran, who has not started yet, could not be reached.

GFI Group has set up a weather derivatives desk in New York to broker plain-vanilla and exotic weather derivatives. Donald Fewer, president and ceo of GFI North America, said the desk started brokering plain-vanilla derivatives, such as heating degree-day and cooling degree-day contracts at the beginning of the month, and plans to add exotics within a year. The exotics would include correlation trades, such as options, which have a temperature trigger but pay out in natural gas, and knock-out and knock-in options.

Sun International Hotels, a Bahamas-based international resort and gaming company, is considering entering an interest-rate swap to convert fixed-interest rates on USD500 million in high-yield debt into a synthetic floating-rate liability. Omar Palacios, director of investor relations in Fort Lauderdale, Fla., explained, "I think right now is a good opportunity because of the steep curve." The company would enter swaps on three bond offerings that carry coupons of 8.75%, 8.68% and 9%. Palacios said it is too early to determine the rates the company would seek to pay and receive in the swap. He added it is likely to be a plain-vanilla swap with a maturity of two-to-five years.

Goldman Sachs will start trading weather derivatives on behalf of customers and on a proprietary basis in the fall, a move that market players say lends investment banking credibility to the growing market in weather risk management. Greg Agran, managing director in New York, told DW the firm decided to set up the department because of a combination of customer demand and improving liquidity. He added that the firm needs to be in the market to offer commodity end users complete risk management products.

Italy's IntesaBci has hired Idriss Nouar, research assistant at French insurance company Sorema in New York, as a weather derivatives trader to jump-start its plans to become a market maker (DW, 7/15). Nouar, who joined the firm last week in New York, is the first of three hires the bank plans to make within the next several weeks. Nouar reports to Richard Turrin, director of structured products in New York. "Idriss has a combination of great knowledge ...and technical degrees in engineering to build us a proprietary system that will give us an edge...and ensure we're not trading with a black box approach," Turrin said. He declined to provide further details on the bank's plans. Nouar referred questions to Turrin.

Lehman Brothers is recommending investors sell puts on stocks they would like to acquire but which they believe are currently overvalued. Paul Lieberman, v.p. of equity derivatives and quantitative research in New York, said investors should sell out-of-the-money puts to earn premium and will be exercised on the options if the price of the underlying falls to more realistic levels.

In 1952 Harry Markowitz showed that the most revelant risk for an investor is generally not the risk of any one investment by itself but rather it is that of the aggregate portfolio of investments. As a result of this seminal work the standard deviation of this aggregate portfolio's return, or of its excess return relative to a benchmark, was for many years the principle measure of investment risk. It was an essential component of the Nobel prize-winning theory of asset pricing by William Sharpe. It was also a key building block of Stephen Ross' arbitrage pricing theory. Value at Risk or VaR has recently supplanted the standard deviation as the preferred measure of risk. VaR can often be interpreted as a multiple of the standard deviation assuming that a portfolio's returns follow a normal, or log normal, probability distribution.

BRE Bank will start pitching barrier options in the Polish zloty against the dollar and the euro within the next six months. Piotr Mielus, head of foreign exchange in Warsaw, said it has not offered exotic derivatives before because the underlying foreign exchange spot market was not liquid enough, adding that the zloty has only been fully convertible for one and a half years.

Senior staff at Cygnifi, a Web-based independent derivatives services company created and spun off by J.P. Morgan last year, are considering jumping ship following the company's decision to narrow its focus a few months ago by eliminating counterparty risk management and several other services, according to market officials. The move to change the focus was due to a slowdown in business, according to one official.

One-month Japanese yen/U.S. dollar implied volatility rose to 11.5% Wednesday from about 9% a week earlier as demand for yen calls/dollar puts increased and fears over a weakening dollar continued to grow. Hedge funds and investment banks were most active buying one-week yen calls/dollar puts last week as the one-month risk reversal moved further in favor of yen calls. The options typically had strikes around JPY122.50 when spot was trading at around JPY121.75.

Volvo Treasury, a subsidiary of the Swedish car manufacturer, plans to use credit derivatives for the first time to hedge counterparty risk on its financial liabilities and expects to enter its debut transaction after the summer vacation. Magnus Jarlen, manager of risk control in Gothenburg, said it will hedge risk originating from loans to partly owned subsidiaries. It may also hedge sovereign risk, for example, if the company decided to build a car plant in Eastern Europe it would consider taking out credit protection on the sovereign. He declined to detail the size of its financial liabilities.