Red Signal to Investment
Concerns over derivatives-linked securities (DLS) based on crude oil are rising as international oil prices are plummeting. The domestic DLS market, which has grown to reach 100 trillion won (US$85 billion) in size, is freezing up, with large losses looming to follow this summer’s panic in the equity-linked securities (ELS) market that resulted from a sharp drop in the Hong Kong H Index.
According to industry sources such as FnGuide, a total outstanding balance of 931.4 billion won was below the knock-in barrier as of Dec. 18. The number of such vulnerable DLS products was 446, and the amount was more than half of the total outstanding balance of 1.7 trillion won.
In addition, 40 products worth 40.5 billion won are predicted to incur losses when the international oil price falls below US$30 per barrel. The oil price plummeted from US$118 to US$30 or so per barrel between February 2013 and recent days, delivering a staggering blow to those DLS products.
More than 100 knock-in DLSs, worth hundreds of billions of won, reach maturity within two months. “It seems that some of the crude-oil DLS reaching maturity soon have lost more than 70 percent of the principal,” said an industry insider, adding, “General investors’ losses could be way more than expected, as the ratio of DLS sales used to amount to 60 percent.”