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This is the first article in a two-part series looking at the characteristics and applications of market models, and their advantage over traditional approaches in pricing interest-rate derivatives. This article reviews the literature and covers the relationship between the well-known Heath, Jarrowand Morton(HJM) approach and the market models approach. Next week's Learning Curve will examine application issues, namely the calibration of the market models to caps and swaptions, closed form solutions useful for calibration and pricing of Bermudan options with Monte Carlo in the context of the market models.

Brazil is looking to issue bonds with embedded derivatives to better manage its debt maturity profile and wants banks to pitch such structures to it, according to DW sister publication Emerging Markets Week. If market conditions are favorable the central bank would like to offer more deals with embedded puts, calls and warrants, said officials at the bank.

Credit Suisse First Boston has hired Sam Vulakh, a credit derivatives trader at Bear Stearns in Tokyo, in a similar position. The firm obtained a credit derivatives license for Japan in late March and has been building its operation since then, according to traders familiar with the firm. Vulakh could not be reached and a CSFB spokesman declined to comment.

Ernst & Young plans to hire approximately 20 risk managers to expand its financial services group. Tim Pagett, head of the financial services risk management practice in London, said it aims to bring the risk managers on board over the next 12 months because it anticipates increasing demand in the wake of the proposed Basel Capital Adequacy Accord and a more liquid credit market. He added, "Anybody who works in financial risk department needs to be conversant with all the risks associated with derivatives." There are currently 42 pros in the group.

Deutsche Genossenschaftsbank is pricing a EUR1 billion (USD877 million) synthetic securitization of loans to hit the market in the first 10 days of August. Joerg Huber, head of syndication in Frankfurt, said the portfolio consists of loans to small and medium sized companies refinanced by German credit agency KfW. The transaction is part of a long line of similar deals issued after KfW announced its intention to support the transaction in December (DW, 12/24). Huber is not deterred by bringing a EUR1 billion deal to the market during prime vacation time. He said he has already received a lot of demand for the CDO from DG's cooperative banks and European institutions and it only started pricing Thursday.

The Kowloon-Canton Railway Corp. (KCRC), a railway operator in Hong Kong, may enter interest-rate swaps in which it pays floating because it anticipates that interest rates will continue to fall. Jeffrey Cheung, deputy finance director in Hong Kong, said the corporation will consider entering swaps on the back of a 10-year USD1 billion 8% global bond it issued in March last year.

HSBC has hired Andrew Broeren, associate director in the structured finance group at Standard & Poor's in London, and Stuart Benzie, associate in the wholesale banking and risk management practice at McKinsey & Co. in London, to beef up its securitization team. Bahman Jahanshahi, head of private and structured finance in treasury and capital markets in London, said HSBC made the hires in response to demand from U.K. corporates that want to securitize assets and from investors who want to get exposure to the transactions. He added this was part of a long-term trend rather than in response to any immediate factor.

HSBC recently brought aboard C.S. Yang, former corporate finance mergers and acquisition specialist at J.P. Morgan in Seoul, as v.p., treasury, head of derivative sales in Seoul. He replaces Shim Kai Wan, v.p., treasury, who has relocated to HSBC's Toronto office.

Credit default-swap spreads for five-year credit protection on Invensys more than doubled last week after the company issued a profit warning and its chief executive resigned. Protection prices on the U.K. manufacturer blow out to 350 basis points Wednesday from 150bps the Friday before. Traders said Invensys is a liquid name so there continued to be a two-way market but offers to write protection started drying up as banks' credit lines were slashed by their credit departments, according to one trader. The typical deal size was EUR10 million (USD8.8 million).