South Korea Investors Seek Protection After Missile Test

Updated on
  • Investors buying call options to hedge against won decline
  • Korean credit default swaps jump amid political uncertainty

Safe Havens Pummeled, Gold and Yen Weaken

While financial markets in Seoul were mostly sanguine after North Korea’s intercontinental ballistic missile launch, a flurry of derivatives activity signaled some investors are looking for protection against further deterioration in the won and local debt.

North Korean leader Kim Jong Un’s recent missile tests have raised fears of escalating tensions and the impact on South Korea’s economy. That may have added pressure on the won, which was the worst-performing major currency in Asia in the second quarter. The bond market Monday saw its biggest single-day outflow since at least 2011.

Initial technical resistance levels in the dollar-won are slowing the pace of the local currency weakness, but a breach of these may see the won depreciate rapidly. The won was little changed Wednesday to trade at 1,150.45 per dollar.

Worries of further won weakness has resulted in surging demand from corporates and hedge funds for call options to hedge against or speculate on a potential decline in the local currency.

The cost of insuring against a default in South Korean sovereign or corporate debt rose to near a seven-week high on concerns that any fallout in the local economy may affect the government’s fiscal strength. The 5-year yield was little changed at 1.96 percent after climbing nearly 5 basis points in the past two days.

(Updates with prices in third and last paragraphs.)
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