[Derivative ABC] What Is the Premium/Discount Rate of 'Wonyu ETN'?

[Image source=Yonhap News]

[Asia Economy Reporter Ji-hwan Park] Among the products frequently mentioned in the stock market recently is the leveraged crude oil futures Exchange Traded Note (ETN).

This product is an oil index product designed to track twice the daily movement of the West Texas Intermediate (WTI) futures index. Usually, there are no issues, but if the product fails to properly reflect the underlying asset, crude oil prices, it can trade at prices overvalued by hundreds of percent (%). This phenomenon has occurred from early March, when crude oil prices began to plunge, until recently. In particular, leveraged products can result in greater investor losses because if the underlying index value falls by 50% in one day, a -100% return is applied.

The main reason novice investors suffer losses when entering the crude oil market can be explained by the premium/discount rate. The premium/discount rate is an investment risk indicator that shows the difference between the market price and the net asset value (NAV) of the investment asset as a percentage. A positive premium/discount rate means the product price is higher than the fair value, while a negative rate means it is undervalued compared to the fair value.

To explain in more detail, when the premium/discount rate is high, investors end up buying at prices higher than the actual futures price. Recently, the premium/discount rate for leveraged crude oil products ranged from 400% to 700%, meaning investors paid 4 to 7 times the original price to purchase the product.

If the premium/discount rate is 700%, it means a product with a fair value of 1,000 won is trading at 8,000 won. On the 22nd of last month, the premium/discount rate of Shinhan Leveraged WTI Crude Oil Futures ETN recorded 847.8% based on the closing price. On that day, the closing price of the product was 650 won, but its actual value was only 68.58 won.

The most important point for novice investors to keep in mind is that crude oil derivative products like ETNs are futures investments, not spot investments. Simply thinking that if crude oil prices double, profits will also double based on current oil prices can lead to significant losses.

This product is issued by securities companies on their own credit and adjusts supply through liquidity providers (LPs). If the market price is significantly higher than the index value, LPs sell their holdings to lower the price. Conversely, if the market price is lower, they buy to raise the price. However, recently, due to a surge in demand for crude oil derivatives, liquidity providers struggled to secure and supply inventory to the market. As a result, the premium/discount rate could not be controlled.

A financial investment industry official advised, "Before investing in crude oil ETN products, it is necessary to click on the stock information to understand the net asset value (NAV) and select products where the premium/discount rate is not excessively wide."

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