House of the Year, South Korea: Hana Financial Investment

­At a time when the Korean financial regulator warns of rising risks in the booming market for structured equity products, Hana Financial Investment (HFI) launched a new product that is not only more profitable, but also less demanding on dealers in terms of risk management.

The product is a self-collapsible structure linked to the won-denominated versions of the three most popular underlyings: the S&P 500; Euro Stoxx 50; and the Hang Seng Chinese Companies Index (HSCEI) that its French banking partner Société Générale launched in December 2018.

The hedged indices address a long-standing risk management problem facing distributors in the Korean automatic calling market. Standard auto-call products in Korea are usually denominated in won, but are tied to offshore indices that settle in a range of currencies, leaving currency risk to be managed.

By obtaining a proprietary license from the three index providers, Societe Generale was able to create currency hedged underlyings, denominated in won, which closely track the original indices. This eliminates the need to manage the built-in currency risk and the associated cost that banks add to their products to offset it – known as quantum adjustment.

“We worked with Societe Generale to distribute this product on the Korean market,” explains Sangho Lee. “This kind of currency inefficiency has been present in structures related to stocks sold in Korea for over 10 years. With Societe Generale, we thought what to do to manage this cost of ineffective currency hedging?

The index works by investing in one of the underlying benchmarks and adds a futures forex, which hedges the currency risk of the benchmark against the won. The index is covered monthly.

The attraction for investors is an increase in yield. About 1% of the initial value of a typical autocall contract is the built-in quanto buffer, explains Lee. By using currency-hedged indices instead, brokers can offer a 0.5-1% increase in coupon per year – a 20% increase in return – and without taking on any additional risk.

“Since this hedging cost reduces the coupon we can provide, one way to provide a higher coupon with a similar level of risk is to use won hedged currency indices instead of regular indices,” says Lee. .

Since the autocall products linked to the new forex indices were first issued by HFI in January, investment volumes increased rapidly.

Since this hedging cost reduces the coupon we can provide, one way to provide a higher coupon with a similar level of risk is to use won hedged currency indices instead of regular indices.

Sangho Lee, Hana Financial Investment

In just five months, the total market value of autocall products linked to currencies hedged indices as an underlying asset grew to $ 846 million, representing 8.1% of volume. total Korean structured products over the period. HFI holds by far the largest market share, emitting 87% of the products.

“Through close monitoring of each index and the continued provision of numerous educational opportunities for investors to promote market understanding of this new underlying asset, Hana Financial Investment has not only been able to maintain its strong presence in the markets. hedged in foreign currencies. DLS Marlet [derivatives-linked securities] but also contributed to the expansion of its market, ”explains Lee.

Introducing Cross Coverage

The securities firm has also worked on improving its management of exotic risks generated by the issuance of self-callable products.

Historically, Hana Financial Investment has relied on two types of hedging plans. One is static back-to-back coverage, which transfers the gains and losses from automatic call coverage to foreign banks. The second is internal dynamic hedging, where the securities firm seeks to limit its exposure to delta, gamma and vega by adjusting its hedges according to the evolution of the underlying.

In early 2018, Hana Financial Investment began to take a new approach, which it calls cross-hedging. The cross-hedging scheme sits in the middle of the two traditional approaches to hedging, which means the bank can take less risk compared to dynamic hedging, but achieve higher returns than static hedging.

“Thanks to this unique cross-hedging system, which goes beyond the existing framework in terms of risk management strategy in the structured products market, Hana Financial Investment has been able to provide its clients with competitive pricing and compensation structures. Said Lee.

“In fact, around 45% of equity-related products issued by the internal trading team in May 2019 are covered by this cross-hedging strategy and Hana Financial Investment is expanding its internal hedging and risk management capabilities to apply them. more cross-cover ideas.


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