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Five-year credit default swap spreads on DaimlerChrysler blew out last week to 160 basis points as the market waited for a multi-tranche bond from the auto manufacturer to be priced. The market had been nervous that the company would not be able to sell the bond at all, which would signal that the company could be in dire straits as it could not fund itself. But the car company successfully sold USD1 billion of five-year debt, USD1.5 billion of ten-year debt, USD1.5 billion of 30-year debt, EUR2.75 billion (USD2.58 billion) of three-year and GBP350 million (USD521 million) of six-year debt. Richard Gillingham, head of credit derivatives at Bank Gesellschaft Berlin, said on Tuesday the price for protection fell off its 160bps peak as investors started selling protection on the name because prices looked comparatively rich—although auto names had widened, most were not as wide as DaimlerChrysler. By Thursday, as DW was going to press, five-year default swaps on the name were trading at 145bps. The typical notional sizes were between USD10-20 million.

DBS Bank, Singapore's largest local bank, is rapidly building its treasury operations with more than 10 new hires expected over the next two weeks, many of them derivatives professionals from J.P. Morgan Chase. DBS has within the last year or so set up foreign exchange, interest-rate, equity and credit derivatives teams (DW, 11/29/99), in a bid to become a regional player. Water Cheung, managing director and head of derivatives, treasury and markets in Singapore, said regulatory changes by the Monetary Authority of Singapore last month allowing interbank trading of Singapore dollar/U.S. dollar options look set to boost that market considerably, making now a good time to hire. DBS is also considering hiring derivatives marketers in Thailand, and has hired several professionals in Hong Kong over the past three months, he said. He declined to elaborate. Peck Kwan Yip, institutional foreign exchange sales professional at Chase, joined as an institutional foreign exchange derivatives sales professional late last month, according to an official at DBS in Singapore. A further two hires in the foreign exchange derivatives team are also imminent.

General Re Securities is planning to target the institutional investor market for the first time and plans to offer insurance derivatives, structured credit products and guaranteed funds by the end of the first quarter. The move represents a volte-face for the former General Re Financial Products both because it has long targeted derivatives players in the interbank market, and because early last year it was said to be on the verge of being sold (DW, 1/24). It will still market to banks. Kevin Lecocq, global head of marketing and structuring in London, said the boutique has been re-staffing and is using this as an opportunity to pursue this new client base. It is looking at products in which it has expertise and in which it has seen potential client demand.

In the latest twist in traders' growing interest in taking positions in Mother Nature—such as weather derivatives and catastrophe bonds—a forest management consulting firm in Ketchum, Idaho, is planning to launch a fund that would buy easements on forests, with a view to trading CO2 credits generated by the assets. Forest Securities is looking to raise some USD20 million from institutions and high-net-worth individuals in the next six months, and is already in negotiations to acquire easements on assets, Cody Walden, president and ceo, told DW. The fund could grow to USD200 million within the next several years, he estimated. It would look to trade over-the-counter CO2 emissions credits, and set up a trading exchange to help unlock value from the forests. "By acting early, you can get the...highest performing projects for the best pr

Landesbank Hessen-Thüringen Girozentrale is preparing to test a credit default swap pricing model developed by professors at Goethe University. Carsten Sausner, a financial mathematician at Helaba, said the model prices credit default swaps using parameters including Euribor, the 10-year swap rate and the price of the credit's corporate bonds. The bank plans to turn the raw equations into a calculator and then test it against market prices. After testing for three months, the bank will determine the effectiveness of the calculator. Han Lee, head of model development and quantitative pricing at Reech Capital in London, said there is no single model that the market uses to price credit default swaps. He said consensus is moving toward an intensity approach, where the price is calculated from market data, such as interest-rate swap spreads and credit default swap prices for other names. The alternative method, firm valuation, looks at the fundamentals of the credit.

Centrobanca has sold to Banca IMI a six-month knock-in put on shares of Banca di Roma, in order to hedge a recent reverse convertible issue. Luca Colombo, trader at Centrobanca in Milan, said the strike on the put is EUR1.178 (USD1.118) with a knock-in at EUR0.9424. The six-month note boasts an 8% coupon, or 16% on an annualized basis. The notional size of the put is EUR3.3 million. Last Tuesday, the underlying stock closed at EUR1.22. SanPaolo IMI bought the reverse convertible in a private placement, according to Alessandro Canali, head of structured products at Banca IMI in Milan. Banca IMI is the investment banking affiliate of retail bank SanPaolo IMI. An official at SanPaolo IMI said it bought the reverse convertible on Banca di Roma because the note offered a high coupon and it thinks Banca di Roma's share price will not be below the strike level in the next six months.

Hirst Investment Management, an Orlando, Fla.-based alternative investment firm, is launching the Hirst MetaStrategy Ltd fund, targeting investors with a minimum investment of $100,000. The hedge fund uses what Gary Hirst, founder and chairman of Hirst Investment Management, calls a computational-intelligence model that puts about 20 major hedge fund strategies to use, including long/short, emerging markets, market neutral and merger arbitrage. This system, Hirst said, will create allocations for different investment styles and targets steady annualized returns of 18-20% a year. "I've been in alternative investments for 27 years," Hirst said. "And the most important factor in determining your investment return and risk is your choice of styles." The fund carries a 2% management fee and a 20% performance fee, he added. "We're not going to make 50% any year," Hirst said, noting his main goal for the fund is preserving capital, not trying to achieve wildly above-average returns. "If you can make 20% a year, every year, that's a good return," Hirst said.

The credit derivatives market is torn over the issue of restructuring as a credit event, but is urgently trying to reach a resolution before liquidity drops, according to International Swaps & Derivatives Association credit derivatives documentation task force meeting minutes obtained by DW. Players continue to be at odds regarding whether restructuring should be a credit event under standard quoted prices for credit default swap contracts, and if so, whether the language of the definition should be modified. Roughly 20 market participants, including Merrill Lynch, Morgan Stanley Dean Witter, and Abbey National Bank, aired their views at the December meeting in London and New York. A general discussion followed.

One of the difficulties in managing equity and foreign exchange barrier option books is handling potentially unstable gamma positions when the spot is near the barrier and/or the option near expiry. The figures below illustrate such an example using a down-and-out put. The option matures in one month, is struck at-the-money, and has a barrier at 80% of the strike. The top figure plots the option price versus spot and the large curvature near the barrier indicates a large gamma. This is clearly seen in the lower figure, which illustrates the corresponding gamma. The gamma profile near the barrier is quite unstable and the delta hedge will be inefficient and often costly. This is one of the main barrier risks. One technique to manage such risks is to use exponential soft barriers.

A new regulation in South Africa likely to come into effect at the end of March is expected triple the volume of securitizations and synthetic securitizations, which will in turn boost the over-the-counter derivatives market. Gill Raine, head of financial engineering at Rand Merchant Bank in Johannesburg, expects the number of securitizations to rise to 30-40 a year from about 10. "This could open a whole new world for over-the-counter derivatives," according to Bruce Stewart, chief derivatives dealer at South African bank Nedcor Bank in Johannesburg. Structuring securitizations requires fixed income derivatives, and the market should be boosted as a result. He said there is no doubt that volumes will increase but thinks that the demand for synthetic securitizations might not take off as quickly because investors will have to get comfortable with the products.