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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 He has been replaced by Joe Rigby, a swaps and foreign exchange trader at the firm in Tokyo, according to market officials.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.

Traders bought one-week Australian dollar calls against the U.S. dollar Wednesday after one-week implied volatility rose by a percentage point in one day to 15%, to bet on an anticipated rise in the Aussie dollar. The rise in vol, in anticipation of Wednesday's 50 basis point interest-rate cut by the U.S. Federal Reserve, was expected to continue, said traders in Sydney and Melbourne. The Reserve Bank of Australia is not expected to cut interest-rates as aggressively when it meets tomorrow. This should help the Aussie dollar appreciate against the greenback, they said.

Market makers were buying euro calls/dollar puts last week in an attempt to cover two euro/dollar options positions that traded last month, estimated at USD2-4 billion (notional). Deutsche Bank and Bank of America reportedly bought the options, and some traders said these positions were on behalf of customers. Traders at Deutsche Bank and BofA declined comment.

Zurich Capital Markets has hired a pair of senior derivatives bankers as part of its effort to establish an over-the-counter powerhouse in Sydney. Stephen Conrad, head of structured trading and derivatives at Macquarie Bank in Sydney joins this week, to be followed by Richard Howes, co-head of agricultural derivatives at Macquarie in Chicago, according to market officials. Both are veterans of Bankers Trust, as are most of the senior capital markets officials at Zurich.

TD Securities is looking to hire two to three U.S. institutional derivatives marketers focusing on structured credit products within the next six months. The bank recently hired Paula Klara, senior v.p.-credit derivatives marketing and structuring at Donaldson, Lufkin & Jenrette in New York, to head up the group, which has two other marketers, said Joe Hegener, managing director, global head of high-yield credit derivatives, collateralized debt obligations, and co-head of loan trading and sales in New York.

Traders sold six-month at-the-money Taiwan dollar/U.S. dollar straddles Thursday as an appreciation in the Taiwan dollar pushed down volatility on the pair. One-month implied vol fell around a percentage point to 4.3%/5.3%, said a trader in Singapore. This happened as the Taiwan dollar appreciated to TWD32.365 at the close of trading Thursday from TWD32.397 Wednesday, he said. Volatility tends to drop when the Taiwan dollar appreciates against the greenback, he added.

Five-year credit default swap spreads on Australian telecom company Telstra Corp. tightened last week, partly on the back of a positive change in sentiment among equity analysts, said traders in Sydney. Five-year credit default swaps on Telstra traded twice Monday at 67 basis points and 68bps, compared with Jan. 19, when it traded at 73bps, traders said. Telstra's capital expenditure seems to have bottomed out recently, according to analysts' reports, helping its stock rally to AUD7.12 (USD3.93) last week from a low of around AUD6 in August, one trader noted.

Foreign & Colonial is launching a retail investment fund this month that will use listed and over-the-counter currency and equity derivatives. The fund, dubbed Blue, is a low-risk vehicle that will invest in low-coupon bonds and the Dow Jones Euro STOXX 50. Stephen Dolbear, director and head of derivatives in London, said it will hedge equity risk with futures and options and swap some of the foreign exchange risk on its bonds into sterling. Dolbear said it is likely to use OTC equity options when it wants to use a barrier option, or if it needs a maturity or strike not available in the listed market.

Pugh Capital Management will add about $20 million to its telecom and auto exposures over the next few months and sell agencies, on the view that the corporates are liquid and will bounce back in an economic recovery. It is mainly supply issues driving down the price of telecom, says Mary Pugh, who manages $450 million in taxable-fixed income for the Seattle, Wash.-based firm. Declining to discuss specific credits, she says the telecom and auto sectors are large parts of the indexes, and their spreads have widened about 100 basis points over the last year.