Korea Exchange is gearing up to launch its long-awaited volatility index futures and sector index futures on November 17.
The Kospi200 volatility index futures is linked to the Kospi200 volatility index and will allow market participants to directly trade volatility within the local stockmarket. There are also a total of four sector index futures to be listed in November covering sectors including energy and chemicals, information technology, finance and consumer goods.
“Market participants will be provided with better and precise risk management tools,” said Korea Exchange in a statement. “Providers of equity-linked securities (ELSs) and exchange-traded notes (ETNs) will be able to manage volatility risk at a lower cost. Furthermore, the sector index will also enable providers of exchange-traded funds (ETFs) to better manage risk of the listed sectors.”
Je Kwon Ryu, head of derivatives products development at Korea Exchange, told SRP that the cost of hedging will be lower than trading derivatives on the over-the-counter (OTC) market. “We are at the final stage of getting regulators’ approval on the [exchange’s] transaction fee which I believe will be lower than that of trading at the OTC market,” he said. “In addition to the lower cost of hedging volatility, trading through the exchange will be much better in terms of its stability and reliability.”
KRX also stated that the volatility index futures price can be used as a prediction mechanism to forecast stockmarket movements and as an indicator for preserved market downturn risk. The exchange also said that the overall stockmarket will be enhanced through the future introduction and development of new kinds of ELSs, ETFs and ETNs that will be benchmarking Kospi200 volatility index futures or sector index futures.
“While liquidity will be the determinant of the kind of activity within the volatility index futures, we positively believe that with a large size and active local ELS market we expect to see more than 20,000 deals transacted within one day as most ELSs in South Korea are linked to the Kospi200 index,” said Ryu. “We initially planned indexing these futures to be used within ETNs. However, we believe that indexing futures will still take one more year.”
Ryu also said that the exchange will introduce smart beta and low volatility indices when “stable liquidity” is guaranteed in the index futures market.
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