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In their second article, Johan Beumée and Paul Wilmott look at how to construct a pricing model for warrants.

Korea MOODY'S Investor's Service downgraded the Republic of Korea to sub-investment grade status on December 21, the country's third successive downgrade in just over a month.

TELECOMMUNICATION Corporation of New Zealand (Telecom) will lose its two major shareholders this year as US phone company Ameritech and Bell both offload their holdings. Together, the two separate deals are expected to raise between $4bn and $5bn and generate considerable interest in New Zealand's largest stock. A spokersperson for Bell said the company plans to sell about $2.6bn of exchangeable notes due in five to seven years. He added that the notes will be exchangable into Telecom shares for a premium, from 18 months after the initial sale.

MERRILL LYNCH and ABN AMRO have been appointed as joint lead managers to the privatisation of Australia's Totalisator Agency Board (TAB), with Deutsche Morgan Grenfell on board as international co-lead manager. Bankers Trust is adviser to the New South Wales government on the A$1bn IPO for the gambling operation, expected to be listed in April or May. The deal is the first privatisation in seven years by the NSW government, said one analyst, but adds to a bulging pipeline of deals from the country.

* Hong Kong's first IPO of the year received a lukewarm response from investors who subscribed to only 42% of the shares on offer for electrical appliance distributor Q-Tech Holdings. The company made 67m shares available last week at HK80 cents a share, of which 60.3m shares were offered to the public and 6.7m on a preferential basis to employees. The stock will be begin trading January 12.

THE KOREAN government is set to make a decision in the next 48 hours on the shape of a mammoth fundraising programme aimed at injecting much needed foreign funds into the country. At stake is the ability of Korea -- and other Asian countries -- to mobilise private sector liquidity in the long haul away from the brink of financial catastrophe now hanging over the region.

THE KINGDOM of Thailand is set to make its first decisive move back into the international bond markets since the onset of the currency crisis, by mandating Merrill Lynch for a dollar financing on behalf of partially state-owned Industrial Finance Corporation of Thailand (IFCT). The bond is slated for launch in February and may total at least $300m.

THE INDIAN government looks set to capitalise on the recent success of its sell-down of shares in domestic telecoms operator Mahanagar Telephone Nigam Ltd (MTNL) with a new offering of stock in international telephone operator Videsh Sanchar Nigam Ltd (VSNL). Local bankers said that the government decided over the holiday period to push the company to the top of the privatisation queue ahead of expected offerings by the Indian Oil Corporation (IOC), Gas Authority of India Ltd (GAIL) and Container Corporation (Concor).

A QUARTET of Hong Kong dollar bond issues provided the only respite to an otherwise bleak outlook for the Asian debt markets this week. Transactions by the Council of Europe, Australia's Export Finance & Insurance Corporation (EFIC), US agency Fannie Mae and the World Bank were launched into an auspicious climate whereby investors reaped the benefits of historically high yields and the borrowers achieved aggressive sub-Libor funding targets of 30bp to 40bp.

INDONESIA'S financial markets went into tailspin this week as a sovereign debt moratorium loomed and the prospect of the forced resignation of long serving president Suharto came ever closer. As the clouds gathered the local population began hoarding food ahead of expected social unrest. The arrest of four Bank Indonesia officials also cast doubt on the fate of a planned international bond of up to $1.5bn for the republic.

THE JAPANESE government's plans to increase the debt burden on the seven Japan railway companies (JRs) may force a postponement of the second tranche offer of East Japan Railway Co, also known as JR East, until the unpopular proposal is resolved.

THE REPUBLIC of the Philippines is weighing up plans to raise at least $500m via a syndicated loan, or to issue a new sovereign bond to provide a stabler international benchmark for the corporate sector. Manila based bankers said that having been inundated with proposals, the central bank has not yet made a decision about which way to turn.