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Derivatives

Low Rates In Korea Spur Innovation

Record-low interest rates in Korea are stimulating product development and pushing out the interest rate swap curve. Merrill Lynch, for example, is working on a landmark dollar/won thirty-year cross-currency swap transaction, which market participants said would be a first for the market.

Record-low interest rates in Korea are stimulating product development and pushing out the interest rate swap curve. Merrill Lynch, for example, is working on a landmark dollar/won thirty-year cross-currency swap transaction, which market participants said would be a first for the market. "It will be a sign of further market maturity," said a trader at a rival firm. Officials at Merrill declined all comment.

"Interest rates are lower here than the U.S. for the first time--this is fueling product development in this market," said J.S. Kim, senior v.p. in fixed income at Lehman Brothers in Seoul. Many market participants expect the Bank of Korea to cut its 3.25% interest rate by a further 25 basis points in the first quarter. The central bank cut rates in August and November.

"Market participants are starting to look at the case in Japan," added Kim. Exceptionally low interest rates in Japan have pushed product maturities out to 20 or 30 years as investors searched for yield.

The Korean swap curve extends to 10 years, but officials said in the last few months bankers have made initial forays into 12 and 15-year interest rate swaps. "[A liquid curve] may take one or two years, but it will happen," noted a senior official at a bulge bracket house.

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