Traders at bulge bracket derivatives houses, such as Citibank, Deutsche Bank and Société Générale, in Korea expect volumes of interest-rate options, including caps, floors, and swaptions, to rocket this year on the back of the Korea Futures Exchange launching options on Korean treasury bond futures in May. "Price-makers for caps and floors will be able to use the options to [hedge] volatility," said K.H. Kim, v.p. of derivatives products at SG in Seoul. He continued that by year-end, trading in interest-rate options could reach daily volumes of KRW10-20 billion (USD7.6-15 million). Current volumes are KRW100 billion a year, said an official at Citibank in Seoul.
SG's Kim continued that while clients have shown interest in caps and floors in Korea, especially in the last two months because they expect rates to rise by the summer, volumes have been limited due to unfavorable pricing. Once trading houses are able to hedge their risks via options on KTB futures, prices will come down, resulting in greater demand, he said.
"Options on KTB futures should increase local players' receptiveness to OTC interest-rate products," said a trader at Deutsche Bank. He expects that caps and floors will become a flow product by year-end.
