Many ELS Products Approaching Knock-in Thresholds
ELS products based on European stock markets are on the verge of principal losses amid the spread of COVID-19.
The Euro Stoxx 50 index plummeted by 12.4 percent to 2,545.23 on March 12 and by 33.8 percent for the latest one-month period, while S&P 500 and Nikkei 225 dropped 26.4 percent and 22.1 percent, respectively. This has to do with the ongoing rapid spread of COVID-19 in Europe, the United States’ entry ban on those from Europe, and the European Central Bank’s decision not to cut interest rates.
In South Korea, a large number of ELS products are linked to the Euro Stoxx 50 index. According to the Korea Securities Depository, such products released this year add up to 13.4 trillion won and the amount to be redeemed amounted to 41.56 trillion won as of the end of last month. Besides, many ELS products are based on combinations of Euro Stoxx 50, S&P 500, Nikkei 225, Hong Kong H, and so on, which means those products may result in losses, even in the event of any recovery of the non-European indices, if the European index continues to drop.
Even a few days ago, the consensus of the market was that losses would be unlikely. However, predictions have been reversed more recently. Most of the products released this year were set at a Euro Stoxx 50 index of 3,400 or so. Assuming a knock-in threshold of 50 percent or 60 percent, this means no principal loss will occur unless the index reaches 1,700 to 2,000. Products released late last year, however, are getting closer and closer to their thresholds. Those set at an index of 3,700 to 3,800 with a threshold of 50 percent or 60 percent may lead to principal loss at 2,200, which is just 10 percent or so below the current index.