The Bank of Korea, South Korea's central bank with USD120 billion in foreign reserves, is eyeing purchasing derivatives for the first time, according to DW's sister publication Global Money Management. An official at the bank said it is exploring using interest rate and currency swaps for its USD12 billion bond portfolio, which is primarily invested in AAA government bonds. "We're studying swaps for hedging as well as duration targeting," said the official. "As foreign reserves in Asian central banks have been growing...we need to target greater returns," he added. He explained that as the reserves continue to grow in Korea from USD96 billion in 2000 to USD120 billion, the central bank is looking at derivatives. The official declined comment on a specific timeframe for its plans.
"We've been speaking with everyone," said the official, noting that he has been approached by several foreign investment banks, which he declined to name. The Bank of Korea selects counterparties based on factors such as market share, relationships and credit ratings. "Pricing doesn't vary much on liquid products," he added, noting it's not a deal breaker.
"It's definitely a great business opportunity for banks such as ourselves," said a fixed income marketer at a U.S. house in Seoul. The central bank could hedge its market risk on long-term paper via interest rate swaps and pick up yield on the remaining credit spread, according to the banker.
