Derivatives houses in Korea, including Citibank and Deutsche Bank, have started marketing structured notes with a digital payout for the first time. "These offer an enhanced rate of return," said an official at Deutsche Bank in Seoul, adding that clients are hungry for the yield offered in such structures in the current low interest-rate environment. Market officials said the notes were a first for Korea.
Typical digital notes will likely range up to KRW100-200 billion (USD78-157 million) with a one-year maturity. "Customers prefer short-term notes as there is no clear view on long-term rates," the marketer added. For example, a customer, such as an insurance company or investment trust, would purchase a note referenced to the three-month certificate of deposit (C.D.) rate, where they receive a coupon of 6.55% if the C.D. rate stays within a range of 4.5% to 6.5%. If rates rise above 6.5% the coupon is reduced to 2.5%. Alternatively, if rates fall below the 4.5% level, the customer receives a coupon of 1%. The floating rate benchmark is now around 4.8%
A derivatives marketer in Seoul explained that the structured note market is continuing to evolve in Korea as customers' knowledge and experience of the notes is increasing. Last month, firms began issuing callable bonds in Korea (DW 4/28).
