You can preserve your baseband whilst updating. There are plenty of guides on google I've never done it as I don't need an unlock, so can't help you myself.
Remember the current jailbreak for 4.2 is tethered. So every time you turn your phone off or have to reboot/restart it you will have to jailbreak it again...
click on ''check for update'' or on "restore" ! It's gonna tell you that there a new version of IOS & then just click on '' download & install " and then let itune do his thing !!!
As far as I know, you have to unlock iPhone IMEI even if you have updated it to IOS 4.2. If you dont unlock your iPhone IMEI number, then you wont be able to change your subscriber.