Bridging the deficit gap

US municipalities are writing large volumes of swaptions to help plug ballooning budget deficits. But are these local government agencies properly accounting for the risks? John Ferry reports

Marc Krassan, treasurer of the New Jersey-based Delaware River Port Authority (DRPA), could make a killing out of derivatives this year. The authority, a regional transportation and economic development agency, is considering writing $50 million notional in swaptions at some point in the first quarter. Krassan, like many of his counterparts at other US municipal bodies, is eyeing the big upfront payments investment banks are willing to make for the optionality embedded in the debt