ISDA PRESS REPORT - OCTOBER 26, 2001

ENERGY
Dividend uncertainty enhances option pricing risk - Financial Times

EQUITY DERIVATIVES
Dividend uncertainty enhances option pricing risk - Risk News

German power exchanges to merge
Financial Times - October 26, 2001
By Bettina Wassener

Germany's two electricity exchanges, the European Energy Exchange and the
Leipzig Power Exchange, confirmed on Friday that they will merge by the
start of next year in a move that will pool liquidity in Europe's biggest
power trading market.

The rival exchanges said on Friday the move was a "merger of equals," though
existing shareholders in the Frankfurt-based EEX, whose owners include the
Eurex derivatives market, will hold 57.5 per cent of the merged exchange.

Both exchanges were started fairly recently to capitalise on the boom in
power trading after liberalisation in the electricity sector since the late
1990s, but have faced competition from bilateral trades, and jointly
represent only 6.6 per cent of the market.

The LPX, backed by power exchange Nord Pool, launched Germany's first spot
bourse in June last year, just ahead of a similar move by its
Frankfurt-based rival. The EEX began trading electricity futures earlier
this year.

Due to the merger, the LPX will not now go ahead with plans to launch its
own futures contract which had been expected this year. The merged exchange
will offer a combination of the existing trading systems.

The new exchange, to be called EEX but based in Leipzig, will be run jointly
by Hans Schweickhardt, EEX's chief executive, and Carlhans Uhle, his
counterpart at the LPX. About 90 participants from nine countries will trade
at the new EEX.

Dividend uncertainty enhances option pricing risk
Risk News - October 24, 2001
By Sarfraz Thind

The growing spate of dividend cuts in the global markets has made dividends
a potential source of uncertainty in the pricing of equity derivatives.
Companies across the board now have reduced expectations of meeting their
earnings forecasts following the downturn in the economy, which, combined
with increasing use of share buybacks and return of capital as alternative
methods of cash distribution, has placed pressure on dividends, bankers said
Michael Maras, Merrill Lynch

The latest analysis on European equity derivative markets by Merrill Lynch
forecasts a 2.52% decline in the dividend payments of FTSE 100 constituents
for 2001. Merrill's report said that market expectations for earnings and
dividend growth remain excessively optimistic. It added that earnings and
dividend forecasts across Europe are increasingly likely to see a downward
adjustment over the next six months, with dividend growth in the Euro Stoxx
50 index declining by around 2.5%.

Michael Maras, global equity derivatives director at Merrill Lynch, told
RiskNews that the report was intended to warn investors of potential
dividend cuts, so that they re-evaluate their dividend yield ratios. Maras
pointed to companies such as the UK's Rolls Royce and Dutch bank ABN Amro
that have already had their dividend payment ability cast under doubt. He
identified the auto, technology and financial sectors as being especially
vulnerable.

"A lot more trading houses will be reducing dividend expectations. This is a
global phenomenon, though it's a lot more intense in Europe, as [European]
companies have an over-reliance on dividends."

An equity derivatives trader at Morgan Stanley, who asked not to be named,
said that Merrill Lynch was "absolutely right". "We are very, very cautious
about how we price options going through the dividend period."

**End of ISDA Press Report for October 26, 2001**

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Scott Marra
Administrator for Policy and Media Relations
International Swaps and Derivatives Association
600 Fifth Avenue
Rockefeller Center - 27th floor
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Phone: (212) 332-2578
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