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Asahi Mutual Life Insurance, one of Japan's largest insurers, plans this year to significantly increase its JPY100 billion (USD872 million) equity derivatives book in order to reduce by more than one third its JPY2 trillion equity holdings over the next couple of years. The insurer expects the Nikkei-225 to trade in a narrow range around 14,000 this year, and so believes it can make money by selling calls struck at the top end of the range and selling puts struck at the lower end, while selling stocks in the cash markets, said Yasuhiko Sato, manager, equity investments department in Tokyo.

Wall Street firms, including Salomon Smith Barney and Banc of America Securities, are recommending customers sell short-dated single-stock implied volatility to take advantage of the Nasdaq Stock Market's roller coaster ride and the Federal Reserve's surprise 50 basis point interest rate cut last week. Leon Gross, managing director and head of global equity derivatives research at Salomon Smith Barney in New York, suggested selling short-dated calls on new economy stocks, such as Cisco Systems and CMGI, and buying longer-dated calls, after short-dated vol spiked dramatically Wednesday. Salomon is pitching the trade mainly to hedge funds in notional sizes of about USD10 million. In a typical trade a customer might sell three-month Cisco options struck at-the-money with implied vol of 80%, and buy one-year options struck at-the-money with implied vol of 62%. The customer wins if the downward slope on term structures flattens in the near term. By changing the ratio of long options to short options, the investor can instead take a view that implied volatility on the longer-dated position will be higher when the short position expires than the forward vol is now. In this particular example, the ratio of the notional sizes of the options could be 1:2.

Several former Exelon Power Team energy derivatives structurers are launching what they believe will be among the first energy derivatives hedge funds. The fund, to be called GingerBread Man Partners, will begin by trading liquid exchange-traded options, such as natural gas and heating oil contracts on the New York Mercantile Exchange. Once it grows to about USD10 million under management, it will be able to trade off-exchange exotics, for example, best-of options and spark spread options, as well as more standardized over-the-counter products, said Tamir Druz, partner and managing director in Philadelphia. A spark spread option would allow the fund to take a view on the price of power versus the heat-rate-adjusted price of fuel. The fund is looking to take advantage of pricing inefficiencies in the energy options markets. For example, the market is struggling with how to model electric power derivatives, said Druz. Prices for power in a power pool can routinely spike in a summer, then revert to a mean level—behavior that many players' models cannot account for or predict. Many players work off the Black 1976 model, or modified versions of it. These models assume power prices move according to geometric Brownian motion, or randomly. The initials in geometric Brownian motion, or GBM, helped inspire the name of the fund, GingerBread Man. The name is also a reference to the elusive children's book character.

Prebon Marshall Yamane has started brokering listed equity derivatives. Nicholas Ruddell, divisional managing director fixed income and securities in London, said the broker wants to offer these products in order to be a one-stop shop. Prebon already brokers over-the-counter transactions, which tend to be longer-dated, but many players use listed derivatives in shorter-dated transactions because they can more easily mark them to market and there is no counterparty risk. Prebon has been trying to broker trades on the London International Financial Futures and Options Exchange since the middle of last year when the bulk of equity products moved to screen trading, according to Ruddell. Screen trading made brokering listed products more attractive to Prebon because less infrastructure was required to start trading on the exchange.

One yard of one-year yen puts/dollar calls went through the London foreign exchange market last week. The options had strikes of JPY135-150 with one-year maturities, according to European-based traders and brokers. Proprietary traders were likely buying the options to hedge against a surprise tumble in the yen against the dollar, according to traders. The yen was trading at approximately JPY115 when these trades went through. David Bloom, foreign exchange strategist at HSBC in London, said if Japan decides to let its currency depreciate against the greenback in order to bring about an export-led economic recovery, then the JPY135 level could be reached. But with the U.S. facing its own growth problems, the U.S. may look to boost its exports and hence resist such a low exchange rate. HSBC's six-month forecast for the dollar is JPY107.

London-based traders bought euro calls/dollar puts with strikes at parity last week. The buying spree was initiated by dollar spot falling against the euro because of lower-than-expected National Association of Purchasing Management manufacturing survey figures published on Tuesday. The options had maturities of one-three months. The notional sizes were between USD20-50 million. One-month implied volatility stayed high amid the rise in spot, rising to 14.7/15% on Wednesday from 13.7%/14.1% the previous Friday. The lower-than-expected data led vol to rise, but traders added that some increase in vol was to be expected anyway. With the new year, players no longer fear time decay from holding options over the holiday season, and there is hence pent-up demand for options, which would lead to vol increasing. Spot rose from USD0.9305 on Friday to USD0.9460 on Wednesday.

London-based traders bought euro calls/dollar puts with strikes at parity last week. The buying spree was initiated by dollar spot falling against the euro because of lower-than-expected National Association of Purchasing Management manufacturing survey figures published on Tuesday. The options had maturities of one-three months. The notional sizes were between USD20-50 million. One-month implied volatility stayed high amid the rise in spot, rising to 14.7/15% on Wednesday from 13.7%/14.1% the previous Friday. The lower-than-expected data led vol to rise, but traders added that some increase in vol was to be expected anyway. With the new year, players no longer fear time decay from holding options over the holiday season, and there is hence pent-up demand for options, which would lead to vol increasing. Spot rose from USD0.9305 on Friday to USD0.9460 on Wednesday.

J.P. Morgan Chase is assembling a collateralized debt obligation with American Express Asset Management as investment manager, employing the Morgan Intermediate Collateralized Loan Obligation Securities (MINCS) structure. According to BondWeek, an LMW sister publication, market players note that this marks the first time that AmEx will serve as manager of a structured product consisting entirely of loans. In March, AmEx hired Yvonne Stevens and Lynn Hopton from SunAmerica Corporate Finance, a move that industry observers at the time said would allow AmEx to expand its in-house structured product management capabilities beyond high-yield CDOs to include loan structures. The Minneapolis-based firm has managed CDOs with high-yield collateral, as well as some with relatively low loan components, totaling some $3 billion. Calls to Stevens, Hopton and other AmEx officials were not returned by press time. Marketing on the transaction, which is expected to close in March, began late last week. The deal with AmEx would be the bank's sixth MINCS transaction. J.P. Morgan originally developed MINCS to compete with Chase Securities' Chase Secured Loan Trust (CSLT) by providing an investment-grade rating and leveraged exposure to bank loans. The MINCS structure came to be regarded by some investment managers as superior to CSLT for its greater transparency, and market players note that the relative popularity of MINCS could lead to the phasing-out of the CSLT structure. The first MINCS transaction, a $700 million deal that came to market in April 1999, was managed by TCW Asset Management. Others followed with managers including ING Capital and Pilgrim Investments.

Bank Leumi U.S.A. will seek to use new cash and some of the proceeds from matured corporate-bond holdings to purchase high-quality asset-backed bonds, including those backed by credit-card and auto-loan receivables. The strategy is aimed at safeguarding against a slowdown in consumer and investment spending that would hit corporates. Robert Giordano, a senior v.p. who manages approximately $1.5 billion in taxable-fixed income, says he considers current Treasury rates too extreme. "I think it's fear that's driving the Treasury market," he says. Giordano, who is unsure how much cash he'll put to work, says spreads on top-flight three- and five-year ABS could tighten 10-15 basis points as fixed-income investors seek a safe haven in the early part of this year. He focuses on highly-structured ABS from big-name issuers, but will buy the occasional second tranche of a deal.

Segall Bryant & Hamill is funneling new cash, $5-10 million at a time, to agencies and existing corporate positions that it feels will withstand the nearing economic slowdown. Greg Hosbein, director of some $1 billion in fixed income, cites Interpublic Group Cos. (A3/A), an ad agency that has withstood past slowdowns thanks to solid financials, and building supply giant Lowe's Companies (A3/A), which could see increased business if housing finance rates fall, as two such credits. He says higher-quality financial services firms without commercial banking exposure, such as Household International (A3/A) and GE Capital (AAA/AAA), are also attractive, because of what appears to be a healthier consumer-loan market. Hosbein declined to disclose details on other corporate credits the firm is eyeing, but says he is focusing on the five- to 10-year part of the curve, which would benefit most from an easing of the Fed funds rate.

National City Investment Management will seek to use new cash to boost its allocations to select industrial credits that suffered spread-widening last year but could rebound as the Federal Reserve eases interest rates. Andy Harding, a portfolio manager in charge of some $4 billion in taxable fixed-income in Cleveland, says he is ready to make purchases on a security-by-security basis, adding that current spread levels are attractive. Among industrials, he likes long maturities and household names such as Dow Chemical, 170 basis points over the 30-year Treasury, Ford Motor Co. at 255 over, and Wal-Mart Stores at 115 over. The right corporate sectors should outperform structured products in the next six months, says Harding, noting that in some cases there is a 100 basis-point pick-up on a quality A-rated corporate credit versus five-year credit-card ABS. "And being an ABS/MBS guy, that's pretty strong coming from me," he adds. Though he has switched to lower coupons, Harding will maintain his weighting in MBS, which he has seen hold up even in a lower-rate environment.