Kiwoom Securities debuts buy volatility structure

South Korea’s Kiwoom Securities has been granted an exclusive licence from the Korea Financial Investment Association (Kofia) to sell a newly developed buy volatility structure for three months.

Kiwoom ELB 85, which is the first equity-linked bond (ELB) in South Korea featuring a buy vol structure, is linked to the Kospi 200 index and is subject to four one-month observation dates. At the end of each observation period, if the level of the index is equal or below 90% or at or above 110% of its initial level, the product offers a coupon of 3%, otherwise no coupon is registered. At maturity, the product is subject to maximum 12% of accumulated coupons, if the level of the index has met the pre-set condition.

“Currently available equity-linked securities (ELSs) and ELBs only profit when the underlying level rises or decreases, or when there is a limited raise or decrease,” said Yong Bum Kim, head of OTC team at Kiwoom Securities. “In other words, most of the available products only profit depending on the one-way direction of the underlying movement and low volatility. However, our newly developed structure offers coupons when the underlying level reaches a pre-defined condition even once during the observation periods. Therefore, this payoff has a very good chance of performing much better when volatility rises in the short term, while effectively managing risks during a rising volatility environment.”

Kofia stated: “There are a very limited number of products that can profit further when volatility increases, and also there isn’t any product available to take preemptive measures when volatility increases. From the issuer point of view, as the buy vol product can hedge against currently available products, the product will bring provide synergy to the current hedging trading book.”

Kim said: “We could see obvious capital inflows into the structured products market when the Bank of Korea cuts the country’s interest rate. The market saw decreased sales volume as investors were worried about delayed knockouts, as well as potential downfall of index levels due to the potential for a Greek default and also an interest rate rise in the US. Therefore, we saw a need for a stable and profitable structure that can profit when volatility increases dramatically.”

The back-testing of the product resulted in a 101.672% pa return for the past five years and 104.7734% pa for the past 10 years, according to Kiwoom Securities.

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Kiwoom Securities debuts buy volatility structure