More than 50% (2,127) of derivatives-linked securities (DLSs) outstanding in South Korea with a market value of KRW4.7tr (US$4bn) will be exposed to potential capital loss following the price drop of WTI crude oil, Brent oil, gold and silver, of which 990 products worth KRW2.4tr are subject to early maturity from July. In South Korea, almost all DLSs are linked to these commodities, with a few products linked to the Citi Bric Enhanced Commodities Index, Market Vectors US Listed Oil Services 25 Index, S&P GSCI Crude Oil and the PowerShares DB Agricultural Fund.
The plunge in the oil price is in anticipation of Iran resuming its oil exports, and will sooner or later drive up oil supplies, which will further lower oil prices, according to Wongchang Chun, analyst at Shinyoung Securities. “Although there are some products issued in previous years that have breached the knock-in barrier, products issued this year may not plunge to levels that would breach their knock-in barriers,” said Chun.
A number of domestic providers, such as Daewoo Securities, have announced that DLS 972, which is linked to the price of silver, breached its knock-in barrier in early July; while NH Investment & Securities announced that Wm DLS 1065, Wm DLS 1066, NH DLS 1803 and NH DLS 1804 had knocked out. Korea Investment & Securities also said that it will not be paying the monthly coupon on three products (I’m U DLS 211, I’m U DLS 224 and I’m U DLS 256).“Looking at the sharp drop of commodities prices, there should be quite a number of products that have breached their knock-in barriers, especially silver-linked products,” said a senior source at a major securities firm. “I am more concerned about the products that mature during the second half of this year, since as the US dollar is expected to remain strong it will continue to make commodities prices show a falling trend.”
While the WTI crude oil price was at US$109 to US$107 between 2012 and 2014, with the lowest price around US$80, since the beginning of this year the price has plunged to US$50 and currently is trading at US$48.73. The price of Brent crude also plunged by a similar amount, around 55%. The price of silver has been falling continuously since 2012, from US$34.96 to US$14.75, which is a 58% decrease compared with the time of the initial issuance. The gold price has dropped by almost 40% from its highest level of US$1,790, in 2012, to the current level of US$1,096.80.
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