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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.

UBS Warburg has added structured credit products to its credit derivatives trading operation and plans to make additional hires to boost the effort. Hugh Evans, managing director and co-head of global credit derivatives trading in London, said the trading department priced its first synthetic CDO last week. The hire is part of an ongoing effort to beef up the department, which started in March. Evans plans to hire another five to 10 structurers and traders in London, Stamford, Conn., and Tokyo within the next 12 months.

Due to weaker than expected recent economic numbers,Groupama Asset Management has begun to swap 15%, or $45 million, of its portfolio out of corporate bonds into Treasuries and will pursue this strategy over the next two months, says portfolio manager Dan Portanova.

The Texas Permanent School Fund has been taking profits in financial services industry paper as spreads have narrowed in response to the Federal Reserve Board's easing of interest rates. Carlos Veintemilles, who manages $4.5 billion for the $7 billion fixed-income fund, says he has sold $20-25 million each in names including Bank One, Wells Fargo and Bank of America. The Bank One 7.12% notes of '11 (A1/A-) traded at 173 basis points over Treasuries on March 23, and came in to 129 over on July 27 before he sold them. The Bank of America 6% of '09 (AA3/A) followed a similar trajectory, going from 180 to 137 in the same time frame. Veintemilles says the fund is currently keeping the assets raised from the sales in cash.