The development of KOSPI 200 Index futures in Korea Haitong Securities Conference Research Center Gyun Jun ( 全 全) [email protected] 2007. 12. 07 Equity Derivatives Analyst
The development of KOSPI 200 Index futures in Korea
Haitong Securities Conference
Research Center
Gyun Jun ( 全 均 ) [email protected]
2007. 12. 07
Equity Derivatives Analyst
22
CONTENTS
33
44
11Derivatives market in Korea
Past & now of KOSPI200 index futures market
Market participants
Some issues
11
Derivatives Market in Korea
Exchange Traded Derivatives
OTC Derivatives
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Equity Derivatives Market in KOREA
Year 2006
• KOSPI200 Futures Market = KRW 4,071 X 10 12 (KRW)• KOSPI200 Options Market = KRW 144 X 10 12 (KRW)
• KOSPI Stock Market = KRW 848 X 10 12 (KRW)• KOSPI Market Capitalization = KRW 704 X 10 12 (KRW)
• KOREA GDP = KRW 759 X 10 12 (KRW)
Derivatives Market Size in Korea (bil USD)
Source: FSS
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KRX Products
Exchange Traded Derivatives
DateDate ProductsProducts Underlying assetUnderlying asset
1996. 5 KOSPI 200 Index Futures Stock Index
1997. 7 KOSPI 200 Index Options Stock Index
1999. 4
USD/KRW Futures Currency
USD/KRW Options Currency
Gold Futures Commodity
CD interest rate Futures Interest rate
1999. 9 3-year KTB Futures Interest rate
2001. 1 KOSDAQ 50 Index Futures Stock Index (delisted)
2001. 9 KOSPI 200 Futures spread Stock Index
2001. 12 KOSDAQ 50 Index Options Stock Index (delisted)
2002. 1 Single stock Options 30 single stocks
2002. 5 Options on 3-year KTB Futures Interest rate
2002. 12 MSB (Monetary Stabilization Bond) Futures Interest rate
2003. 8 5-year KTB Futures Interest rate
2005. 12 STAR Index Futures Stock Index
2006. 6EURO/KRW Futures Currency
JPY/KRW Futures Currency
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Exquisite timing
History of KOSPI 200 Derivatives
Source : Samsung Securities
0.00
300.00
600.00
900.00
1,200.00
1,500.00
1,800.00
2,100.00
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
(pt)
KOSPI200 Futures
KOSPI200 Options
IMF
IT Bubble
KOSPI
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OTC Products
Equity products
Index (Equity) swap Exotic Options – Basket, Digital, Barrier Equity Linked Securities (ELN) – Capital guaranteed, Yield enhanced Variance swap
Fixed Income products
Super spread notes (CMT)
TARN, Range accrual notes, IRS Currency products
Exotic options CRS
Market participants Securities firms (Local, Global IB) Bank, ITCs, Insurance Hedge fund
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KOSPI200 Index Futures
Product specification
Market size & trend
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KOSPI 200 Index futures in the world
• The 5th largest index futures market in the world : excluding mini futures, the 3rd index futures
• Leading group in emerging market : until 2004, the 1st index futures market in the Asia
Largest index futures in the world
Source: WFE
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Spec
KOSPI 200 Futures Spec
Contract size KOSPI200 index * KRW 500,000 (1USD = 930 KRW, 537 USD)
Contract months Four consecutive near months from the Quarterly (3,6,9,12)
Tick size & Value 0.05pt, KRW 25,000
Last trading day Second Thursday on the contract month
Final settlement Cash
Daily price limit 10% of the previous closing price
Position limits Net position of 7,500 contracts
Circuit breakers +/- 5% of the previous closing price & +/-3% of the dispersion ratio
KOSPI 200 Futures Spread
Final settlement Cash
Contract months
3 contract months between the nearest month series and one of three other series
- The first spread: the nearest month series + the second nearest month series
- The second spread: the nearest month series + the third nearest month series
- The third spread: the nearest month series + the farthest month series
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Trading Size
Average daily trading volume
-
50,000
100,000
150,000
200,000
250,000
300,000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(contracts)
Note: As of Oct 2007Source: KRX, Samsung Securities
• Until 2003, rapid growth of the trading volume: since 2004, trading volume has been stagnant.
• Entering the maturity phase: less volume, more efficiency
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Trading Volume
• DLR (Derivatives Liquidity Ratio), average 330% in 2007: DLR = (Futures trading value / Cash trading value) * 100: Inverse trading indicator
• Early phase after market launched, DLR was lower than 1.0: do not hasty after launching.
DLR at the beginning stage of market
Source: FIA, Samsung securitiesNote: As of Oct 2007Source: KRX, Samsung Securities
DLR
0%
200%
400%
600%
800%
1000%
Jul-97 Jan-00 Jul-02 Jan-05 Jul-07
0
500
1000
1500
2000
2500(pt)
KOSPI(RTH)
DLR(LTH)
IMF 911
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Efficiency in pricing
• Disparity = (Market price – Theoretical price) / Theoretical price * 100: indicator which can measure the efficiency of futures pricing
• Since 2004, no extreme disparity distribution: more efficient KOSPI200 futures market
Distribution of disparities, by year
Source: KRX, Samsung securities
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Volatility shrinking
Historical Volatility of KOSPI 200
Note: based on GARCH model Source: KRX, Samsung Securities
0
10
20
30
40
50
60
70
80
Jan-90 Jan-92 Feb-94 Feb-96 Mar-98 Jun-00 Dec-02 May-05 Oct-07
(%)
IMF
K200Futures
• After the KOSPI 200 futures market launched, IMF crisis invaded: weak relation between the stock market volatility and the opening of futures market
• Since 2000, market volatility has been shrunk.
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Change of stock market after launching futures market
• Asymmetric response of volatility to news
: Only stock market, - since shortage of short sale, over-sensitive response to negative information
: Stock & Futures market, - by capitalization the market information (both positive and negative), the asymmetry response of volatility to news can reduce.
• Transfer of Noise trader from cash market to futures market
: more rapid response to the market information for future market -> effect of leading / lagging : Leverage tools & Retail investor -> Existence of noise trader
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Change of stock market after launching futures market
• Analysis of the stock volatility’s symmetry between pre 96 and post 96 (each 5 years)
• Mitigated the asymmetry of the stock volatility in post 1996
1996.5 ~ 2001.12
Source: KRX, Samsung securitiesSource: KRX, Samsung Securities
1990.1 ~ 1996.4
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Change of Investors’ mix
Triangle of Investors group
Strategy of investors
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Triangle of Investors group
Share of KOSPI200 futures market, by Investors group
Note: As of Oct 2007Source: KRX, Samsung Securities
0
20
40
60
80
100
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(%)
Foreign
Retail
Securitie
ITCs
• Early phase: Securities (dealer) vs Retail (individual)
• Since 2003: Retail vs Foreigner vs Securities
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Stock market & Other investors
Investor breakdown for stock market
Note: As of Oct 2007Source: KRX, Samsung Securities
0
1
2
3
4
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(%)
Bank
Pension
Insurance
Merchant
Note: As of Oct 2007Source: KRX, Samsung Securities
Investor breakdown for KOSPI 200 futures market
0
20
40
60
80
100
2002 2003 2004 2005 2006 2007
(%)
Foreigner
Retail
ITCs
Securitie
• In stock market: retail overwhelming, foreigner vs ITCs
• Other investors in KOSPI200 futures market: only less than 5%
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Restrictions on Foreign Investor
ID registration QFII system not employed limitation on the retention of open interests
Before May 1998
Open interest limit for foreign investor : total investment limit & per capita limit
Loosening the limit for foreign investor positive aspect : enhancing the liquidity of futures market negatives aspect ; indiscriminate inflow of foreign investors
Oct 96 Nov 96 May 97 June 97 July 97 Nov 97 Dec 97 May 98
Equity Individual 5% 5% 6% 6% 6% 7% 50% 100%
Aggregate 20% 20% 23% 23% 23% 26% 50% 100%
K200 Futures
Individual 3% 5% 5% 5% 5% 5% 5% 100%
Aggregate 15% 30% 30% 30% 100% 100% 100% 100%
K200 Options
Individual 5% 5% 5% 5% 100%
Aggregate 30% 100% 100% 100% 100%
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Effect of Foreign Investor in KOSPI 200 Futures market
Foreign investors’ portion in stock market increased Tiger Fund in 1998 The IT bubble burst in 2000 and the Plastic bubble burst in 2002 Strategic portfolio rebalancing with KTB futures
Advanced financing techniques
Arbitrage trading Index swap hedging Options market making & Options-Futures multi trading
Market volatility to be boosted Large scale of futures trading when short-term momentum appeared (domestic investors following)
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Some Issues
Program trading
Like hedge funds – Long / Short
Some lessons
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Arbitrage Trading
ArbitrageCash – Futures Arbitrage : Market basisCash – Options ArbitrageFutures – Options Arbitrage
Cash convert ETF
KOSPI 200 FuturesKOSPI 200 Futures KOSPI 200 BasketKOSPI 200 Basket
ETFETF
Tax exempted
Synthetic FuturesSynthetic Futures
Dividend yieldDividend yieldFinancial costFinancial cost
Source: KRX, Samsung Securities
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Extension of scale arbitrage inventory
Arbitrage
-
1,000
2,000
3,000
4,000
5,000
6,000
Jan-99 Jun-00 Nov-01 Apr-03 Sep-04 Feb-06 Jul-07
(KRW bil)
Csah- Futures Arb
Rev Cash- Futures
Since 2005, arbitrage trading has become more active & bigger.
Arbitrage trading players are ITCs, Pension Fund, Foreign Investors etc..
On every double witching day, the market has been more volatile than normal trading day.Because redemption & roll-over volume of arbitrage are dedicated at expiry day.
Note: As of Oct 2007Source: KRX, Samsung Securities
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Like Hedge Funds
Long / Short Alpha creating possible with short index futures
KOSPI200 FuturesKOSPI200 FuturesBasket
(Value, Low beta ..)
Short Long
KOSPI200 FuturesKOSPI200 Futures Single Stock
KOSPI200 FuturesKOSPI200 Futures Nikkei 225 ..
Source: KRX, Samsung Securities
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Reconstitution of KOSPI 200
KOSPI 200 rebalancing
Once per year: the next day after final trading day of June contractsYear Changes
2003 29
2004 39
2005 11
2006 15
2007 11
New entries
exclusion
Buying pressureBuying pressure
Selling pressureSelling pressure
Long / ShortLong / Short
Source: KRX, Samsung Securities
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Program trading & Impact on stock market
(%)Samsung Elec. POSCO Hyundai Motors SK Telecom
Short Long Short Long Short Long Short Long
2004 4.52 4.55 8.22 8.60 13.96 12.89 13.88 14.65
2005 11.52 11.57 11.83 13.09 12.89 12.35 19.70 20.06
2006 16.54 19.66 14.27 16.33 11.37 12.59 18.55 20.89
2007 17.54 16.83 21.30 19.66 13.18 12.48 20.44 17.35
Note: As of Oct 2007Source: KRX, Samsung Securities
• Program trading accounts for more than 10% of total KOSPI market in 2007: In 2000, less than 3%
• Increasing impact on individual stock: Larger market cap, more exposure to program trading
• More volatile market, more exposure: By index cash – futures arbitrage trading: By basket trading
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Basic of other derivatives
Hedging tools
Hedging of ELS (Equity linked Securities)
-> dynamic hedging by index futures
Hedging of Index swap
Hedging the positions of Index options
-> Market maker
Proxy for regional index
to hedge of other country’s stock market
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Change of Investors’ mix
Imbalance of cash-futures market
Wag the dog effect Conservative Institutional investors are hindered
Domestic investors crowding out from futures market
Reduction of domestic institutional investors’ shares
Unfair trading by cash & futures connection
Large short position in futures market -> drawdown stock market -> bargain hunting the large caps -> short covering the short position in futures market
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High liquidity in futures market
Virtue circle
High liquidity in futures market -> Inflows from foreign investors to stock & futures market -> Amplification of liquidity in the stock market
Contribution of developing other derivatives
Two face of coin -> a lot of dispute on the role of futures market
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Driving Factors for success of Derivatives
1. Volatility – attractable products for hedgers & speculators
2. Money at risk – Market size, Capital flow both of domestic & Cross border
3. Participants – Institutional Investors’ asset, Producer & Distributor, Domestic & abroad
4. Liquidity – Amount of underlying asset cash flow, transaction cost
5. Diversification – to fulfill the various needs of investors
6. Confidence – of regulators, of market participants
Reference : George Tsetsekos, Panos Varangis, “Lessons in Structuring Derivatives Exchanges”, World bank, Feb 2000
Oliver Frartzscher, “Emerging Derivatives markets in Asia”, World bank, Mar 2006
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May 2006
Services available at Samsung DerivativesSam
su
ng
S
ecu
rities
KOSPI 200 Index Futures & Options
Program Trading
Securities Lending and Borrowing (SLB) & Synthetic positions
Equity Linked Warrant (ELW)
And whatever you are interested in….
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