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BNP Paribas is recommending clients buy dollar calls/yen puts to take advantage of an expected dollar appreciation against the yen. Ian Stannard, foreign exchange strategist in London, said the bank is recommending investors enter a deferred premium five-month knock-out dollar call/ yen put with a strike of JPY120. The investor pays a premium of 200 basis points if the dollar depreciates as low as JPY114. If the greenback does not break that barrier, the option is free. The exotic is sold in a minimum notional of USD1 million.

Deutsche Bank is recommending clients sell five-year credit default swap protection on Royal Caribbean Cruises. On a LIBOR basis, selling protection is a better way to gain exposure to the credit than buying bonds issued by the cruise line--four-year bonds at press time were trading at around LIBOR plus 220 basis points, while five-year protection trades around 300bps. Protection is higher than it should be, because the cruise line last week issued USD500 million in convertible bonds of '21, which are putable after four years, said a trader in New York.

Conversion and call rights are common embedded optionality in financial instruments. For example, a convertible bond entitles the holder to convert the bond into common shares of the bond issuer's company. On the other hand, in order to cap the unlimited upside potential of the bond value, the bond indenture usually includes a clause where the bond issuer can call the bond at a predetermined call price. Upon calling, the bondholder either chooses to receive the cash amount equivalent to the call price or to convert into the common shares (this is called forced conversion).

SBI Funds Management, an Indian fund manager with INR29 billion (USD624.9 million) in assets, is planning to use its first Indian rupee interest-rate swap this quarter ahead of expected interest-rate movements in India. It is looking to use fixed-to-floating interest-rate swaps on its bond portfolio, now that interest rates appear to be on the rise, said P.K. Das, v.p.-debt in Mumbai. Some 99% of SBI's INR17 billion fixed-income portfolio is fixed-rate, he said, noting that there is not a well-developed floating-rate bond market in India. Corporate bonds make up over 75% of the portfolio, while the rest are government bonds, he said. The average maturity on the bonds is just below three years, and the average coupon is 11-11.5%, he added. Currently overnight call rates, the most established floating rate benchmark in India, stand at nearly 10%.

A six-strong group of interest-rate derivatives marketers to financial institutions resigned last week from J.P. Morgan soon after collecting their bonuses, according to officials familiar with the moves. It could not be determined by press time if the moves are related to J.P. Morgan's merger with Chase Manhattan. Several members of the team, which included specialists in marketing interest-rate derivatives to agencies, are believed to be heading for Credit Suisse First Boston. Others may be joining Lehman Brothers, according to a Wall Street rival. A spokesman for J.P. Morgan Chase, a spokeswoman for CSFB, and an official at Lehman declined comment.

A working group for the International Swaps and Derivatives Association met as DW was going to press Friday to discuss creating a new definition of restructuring as a credit event. In a letter to members of the working group, Bob Pickel, director and ceo, explained that the goal of the meeting was to discuss possible principles for a new definition of restructuring.

Italy's Crediop has entered a knock-out interest-rate swap to hedge half its exposure on a fixed rate EUR220 million loan it made two weeks ago. Crediop provides funding for local and municipal entities at fixed rates but secures floating rate financing to fund its lending program, according to Luca Lupori, derivatives trader in Rome. The bank decided to use a knock-out interest-rate swap because it was 10-15 basis points cheaper than a plain-vanilla swap, he said, adding that he believes there is little chance of it being knocked out. The Federal Reserve set the direction for future interest-rate movements with its 100bps rate cut last month, Lupori added.

Michael Peier, head of emerging market foreign exchange and derivatives at Lehman Brothers in Tokyo, resigned last week to take a break from the industry. He has been replaced by Joe Rigby, a swaps and foreign exchange trader at the firm in Tokyo, according to market officials.

Korean insurance companies are eyeing credit derivatives for yield pickup as falling interest rates cut into returns on their floating-rate bond portfolios. Samsung Life Insurance is considering its first use of credit derivatives, while Kyobo Life Insurance is eyeing extending its use. Fund management companies are also expected to increase their use of credit default swaps and credit-linked notes for the same reason, according to Young Hee Kim, head of derivatives marketing at Credit Lyonnais in Seoul.

Implied U.S. dollar/South African rand volatility fell to 13.1%/14.1% on Wednesday from 14.5%/15.5% on Monday. Traders bought at-the-money options at the beginning of the week, ahead of the Federal Reserve interest-rate cut on Wednesday. They anticipated a rate cut spurring short-term volatility in the pair, explained a trader in Johannesburg, and hence wanted to be long gamma. Gamma is the rate of change in the delta of an option relative to an incremental change in the price of the underlying. Trades were typically for one-week maturities, in average notionals of USD15-30 million.