North Korea’s threats alarms investors

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North Korea's threats have made the financial market slightly wary, and investors exposed to South Korean stocks and bonds are seeking protection.

Some fund managers and investors reacted to North Korea's threats by buying financial protection in the form of cheap options and credit insurance.

In the CDS markets, aside from fund managers with holdings in South Korea, banks and institutions that had exposure to the won and government bonds also bought protection due to the large volumes of credit linked notes they sold.

Won-denominated credit-linked notes, which are structured investment products offers a high debt-like return and indirect exposure to a company's debt, became very popular in South Korea over the past few years.

However, domestic Korean investors still followed conservative risk strategies to hedge portfolios, convinced that North Korea's threats to attack the South or even more distant U.S. military bases are merely threats.

The local market has not showed signs of investors facing margin calls or buy out-of-the money put options to hedge against a possible sharp downturn in local securities.

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