There has been a marked pickup in trading of variance swaps on Kospi, the Korea composite stock price index. Equity derivative strategists have attributed this in part to volatility buying interest from investors looking to hedge or play an uptick in Korean stock volatility as a result of North Korea's nuclear test. Korean variance is also attractive because it is cheap compared with Standard & Poor's 500, FTSE or Euro STOXX 50. Three-month at-the-money implied volatility for Kospi was at 17.5% at the end of September, compared with 15.5% for historic volatility.
Goldman Sachs is regarded as the dominant player in Kospi var swaps, although traders were at a loss to explain the reasons for its axe. Officials at a handful of other firms, however, including Citigroup and SG Corporate & Investment Banking, said they have stepped up trading of Kospi var swaps over the last two months, in response to an increase in demand from both from local clients and hedge funds in Europe and North America.
