DLS Principal Also at Risk Amid Oil Price Crash

If the reference floor price falls below $51, principal loss concerns arise... Early repayments also decrease

[Asia Economy Reporter Minji Lee] As the forecast for international oil prices has dropped nearly 50% since the beginning of the year, concerns about the knock-in (loss zone) of derivative-linked securities (DLS) based on crude oil prices are becoming a reality.

[Image source=Reuters Yonhap News]

According to the Korea Securities Depository on the 10th, there are a total of 15 crude oil DLS products issued since 2018 that are scheduled for redemption in the first half of the year. Most of these are DLS based on Brent crude oil, with an average knock-in barrier price of $51. This means that if the underlying asset price does not exceed $51 on the maturity redemption date, principal loss may occur.

Oil DLS refers to products that pay agreed returns when international oil prices such as West Texas Intermediate (WTI) and Brent crude move according to predetermined conditions. Principal loss occurs when oil prices fall by 40-60% or more compared to the contract price. For example, the knock-in barrier price for the Korea Investment & Securities True1073 (DLS) maturing next month on the 10th is $50. If the WTI crude oil price, which is the underlying asset at maturity, is lower than this, investors holding this product until maturity will inevitably incur losses.

The scale of early redemptions has also significantly decreased compared to the previous month due to the sharp drop in oil prices. From January 9 to February 9, 44 DLS products based on crude oil underwent early redemption, but only 8 products were redeemed early in the following month. While losses do not occur if early redemption is not made, investors who invested with early redemption in mind may have their funds tied up in the product for longer than expected.

An official from a securities firm explained, "The knock-in for oil DLS starts from the mid-30% range, and considering that oil prices could fall even further, investors with maturity approaching soon are expected to face significant losses due to the short recovery period." As of last month, the outstanding amount of WTI-based DLS was 913.97675 billion KRW, and the outstanding amount of Brent-based DLS was 536.89622 billion KRW.

The international oil price forecast for the first half of the year is trending downward from $50-$70 at the beginning of the year to $25-$60 based on WTI. The market's expectations have dropped by half based on the lowest forecast. Kyuyun Jeon, a researcher at Hana Financial Investment, explained, "With the end of OPEC's production cuts, the support factor for the oil price floor has disappeared," adding, "There is also concern that U.S. shale companies can continue supply at prices lower than oil prices."

This content was produced with the assistance of AI translation services.