Derivatives Securities Feared to Lose Money on Sinking Stock, Oil Prices | Be Korea-savvy

Derivatives Securities Feared to Lose Money on Sinking Stock, Oil Prices

The financial district of Yeouido in Seoul. (Yonhap)

The financial district of Yeouido in Seoul. (Yonhap)

SEOUL, March 23 (Korea Bizwire)South Korean investors in derivatives-tied securities could suffer big losses due to a global stock rout and plunging oil prices, industry sources said Monday.

Sixteen major securities firms have posted online notices that they have sold a combined 1,077 equity-linked securities (ELS) and derivatives-linked securities (DLS) products that may see their principal eroded due to tumbling stock and oil prices, they said.

The unredeemed amount of those products is estimated at slightly over 1.5 trillion won (US$1.2 billion), with DLS accounting for 885 billion won.

ELS refers to hybrid debt securities whose returns are determined by the performance of underlying equities, including a stock index. DLS instruments track interest rates, currency values and other underlying assets.

ELS and DLS products are structured in a way that they may suffer principal losses should prices of underlying assets drop 30 percent to 50 percent from the time of issuance.

Possible losses of those financial products come as the coronavirus pandemic has sent global stock and crude prices nose-diving.

The rapid spread of COVID-19 has recently battered stock markets in Europe, the United States and other parts of the world.

The eurozone’s blue-chip EuroStoxx 50, to which the bulk of local ELS products with potential losses are tied, has plunged 34.1 percent from its high over the past one-year period.

Industry watchers said the size of ELS with the possibility of principal losses could snowball if the coronavirus crisis worsens in Europe.

Other stock indexes in major economies have also been hammered by coronavirus worries.

The S&P 500 has fallen 32.1 percent from its high over the last one-year period, with Japan’s Nikkei dipping 31.4 percent and the benchmark Korea Composite Stock Price Index (KOSPI) plunging 30.5 percent.

Tumbling international crude prices have also fueled worries that DLS, whose underlying assets are prices of U.S. West Texas Intermediate (WTI) and Brent oil, may suffer losses in their principal.

WTI crude sank 10.6 percent to close at $22.53 per barrel in New York trading amid a continued standoff between Saudi Arabia and Russia, which has sparked a global oil price war.


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