Declining equity volatility in recent weeks has taken the sails out of the structured note market in Korea as pricing has become less attractive. "Single-stock vol has declined sharply," said an official at ABN AMRO. For example, realized volatility on Shinhan Financial Group has fallen to 25% from around 40% last year. It has become difficult to price equity-linked notes--a massive local business in the last few years--at attractive levels. "The margin for a deal we were holding and preparing to issue was wiped out within three days," said a senior equity derivatives marketer at a bulge bracket house.
Specialists attributed falling vol to many participants' belief the market has peaked after last year's strong run and will likely remain range-bound. The KOSPI index is down over 3% for this year after a 50% rise in 2005. Equity officials lamented this year will be challenging for equity derivative structurers at international houses, not only because of falling volatility, but also from the increased presence of alternative products such as traditional mutual fund houses offering foreign exposure.
