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European credit derivatives traders were advising their colleagues at German banks to take it on the chin as the financial crisis in Turkey unfolded last week. German banks, including Deutsche Bank, Commerzbank and Dresdner Bank, are believed to have huge basis risk on commercial loans they have extended to Turkish banks, which they have imperfectly hedged by purchasing credit default protection on Turkish sovereigns. "Sit on it and pray," said a trader at a U.S. bank in London. He noted that if the Turkish banks default without an accompanying sovereign credit event, the German banks could be left with substantial losses. Officials at the three banks declined comment.

Paul Croft, chief operating officer of global markets, Japan at Deutsche Bank in Tokyo, has resigned. Croft said he is stepping down to support his wife's business interests in California. He declined to comment on who would be replacing him, but noted that he would remain at the bank for a while to ensure a smooth transition for his successor.

Fortis Bank plans to buy a two-year knock-in put to structure a knock-in reverse convertible linked to shares of Royal Dutch. Leen Verdonk, derivatives salesman in Amsterdam, said the EUR50 million (USD45.73 million) put will be struck at a value equal to the stock's price at Wednesday's close. The knock-in level will be 10% below the strike. Royal Dutch shares opened at EUR66.46 last Monday.

Goldman Sachs has added exotic foreign exchange options to its online trading platform for customers. Zar Amrolia, managing director and global head of foreign exchange sales and e-commerce in London, said Goldman Sachs is the first bank to offer a purely online system which broadcasts prices. He added that offering American-style digital options, which are the building blocks for 90% of structured products, allows clients to execute almost any structure online. The bank has built the system for five currency pairs: euro/dollar, euro/yen, dollar/yen, cable and Australian dollar/U.S. dollar. Within several months, it will expand that to 20 currency pairs.

The interest-rate implied volatility surface exhibits a maturity and smile or skew (strike dependent) structure. This observation means that the interest rate market does not follow the Black-Scholes model.

U.K. asset management company Gartmore plans to launch a long/short hedge fund Thursday that will invest in European small cap stocks and may use over-the-counter derivatives. The AlphaGen Cetheus fund is being launched to take advantage of investor appetite for alternative investments, according to Martin Phipps, head of hedge funds in London. The fund will start with USD50 million of capital.

Korea Asset Management Co., a government agency with USD40 billion in assets, expects to increase its use of currency swaps on the back of a planned expansion of its overseas asset-backed securities issuance this year. Issuing ABS overseas is part of a longer-term plan to tap a wider investor base and ensure liquidity for these investors, said C.H. Kim, executive director, securitization department in Seoul. Although it issued overseas last year, it focused more on the domestic market, he added.

J.P. Morgan has ironed out nearly all the creases in its global credit derivatives trading group following its merger with Chase Manhattan. According to an organization chart obtained by DW, the group is run and staffed almost entirely with officials from the J.P. Morgan side. This is not surprising, according to several market professionals, because the credit derivatives trading desk at Chase was relatively small prior to the merger. Heading up global emerging markets credit derivatives is Guillaume Nicolle, v.p., while Jean-Pierre Lardy, v.p., heads North American flow business in credit derivatives. Both came from J.P. Morgan prior to the merger.

Lehman Brothers and Goldman Sachs are both recommending clients purchase volatility on swaptions to enter into five year swaps in five years. Continued demand for short-dated hedges by mortgage investors and servicers is bidding up short- to medium-dated swaption vol relative to the back end. Similar trades have made sense for at least a month (DW, 1/28), but the value is now in buying options to enter five-year swaps, said George Oomman, chief interest-rate derivatives strategist at Lehman in New York.

Kookmin Bank and government-owned Korea Development Bank are gearing up to become the first domestic Korean banks to structure and market credit derivatives. KDB, with USD65 billion in assets, wants to do this now to benefit from an anticipated increase in demand for credit products, according to H.J. Cho, manager, trading department, financial engineering team in Seoul. The firm has added incentive since margins in interest-rate and currency derivatives are being squeezed as more banks start quoting prices on these instruments, he noted. KDB has a USD25 billion (notional) derivatives book. Kookmin, with KRW97 trillion (USD77.6 billion) in assets, wants to enter because low domestic interest rates are leading yield-hungry investors to consider credit derivatives for the first time, said Nick O'Kane, manager, derivatives and structured products in Seoul (DW, 2/4).