As international oil prices have fallen below the US$50 level per barrel for the first time in 14 months, derivative linked securities (DLS) investors have become tensed up as most DLS are based on oil prices as an underlying asset.
According to the Korea Securities Depository (KSD), the issue balance of DLS came to 17 trillion won (US$15.05 billion) as of Dec. 18, with most of them based on oil prices as an underlying asset.
DLS are a kind of derivative products whose values are driven by actual assets, such as gold, silver, oil prices, bonds and credits, as an underlying asset. When offering for subscription, “knock-in barrier,” which refers to conditions that can cause losses of investment, is more important than the price. For instance, investors are offered with interests on their principals at the redemption on maturity if the knock-in barrier is 50 percent and the underlying asset doesn’t fall below 50 percent until maturity. If it falls below 50 percent only once until maturity, investors are losing money.
According to the KSD, the outstanding balance of oil price DLS stood at 603 billion won (US$533.86 million). DSL with more than 60 to 65 percent of knock-in barriers are all repaid early, while those with 55 percent of knock-in barriers totaled 20 billion won (US$17.71 million). Out of the remaining 583 billion won (US$516.16 million), 74 percent, or 447 billion won (US$395.75 million), came from DLS with 45 to 50 percent of knock-in barriers.
International oil prices hit the lowest point in the past three years at US$26.21 (29,604 won) per barrel in February 2015 but it took an upturn and reached the highest point at US$76.41 (86,305 won) on October 5. Two months later, the figure fell below US$50 (56,475 won) on December 17 for the first time in 14 months and closed at US$49.88 (56,339 won) per barrel.
However, experts said that DLS investors should not be concerned yet. This is because investors will not make a loss unless the oil price falls below US$35 (39,533 won) even when they purchase the products at the highest point of US$70 (79,065 won). An analyst at the KSD said, “International oil price hit the US$75 (84,713 won) level and fell below US$50 (56,475 won) but it is only a 20 to 30 percent drop in terms of percentage. Many investors are worried that they might suffer a loss because the oil price fell below US$50 (56,475 won). However, the outstanding balance is concentrated on DLS with 50 percent of knock-in barriers. It means that they still have some spare capacity.”
Some experts even said that it is the time to purchase DLS products based on oil prices. They said that the products are less likely to enter the principal loss section even when the oil price goes below further. An official from a securities firm said, “If investors buy DLS with 50 percent of knock-in carriers now regardless of the lowest point of oil prices, their principal will be protected until oil prices go below US$25 (28,238 won). US$25 is the lowest point in history so oil prices are least likely to below that level.”
Meanwhile, oil prices fell below the US$20 (22,590 won) level in January to February 2016 and investors suffered huge losses as the amount of knock-in barriers of investment products related crude oil surpassed 900 billion won (US$796.81 million). The price of West Texas Intermediate (WTI) crude oil plunged from US$114 (128,478 won) per barrel in April 2010 to US$26 (29,302 won) in February 2016, while that of Dubai crude oil decreased from US$124 (139,748 won) per barrel in March 2012 to US$26 (29,302 won) in 2016.