Forex Investment and Currency Trading

USD/KRW spot has been extremely volatile of late, on the back of the broad emerging weakness as well as intervention effort by the central bank. 1-month implied vols has gone from 16 vols a couple of weeks back to 23 vols now. In the near term, given the spillover effect of the meltdown in US equities and the continuous foreigners outflows from Korean equity market , we should see USD/KRW spot continue to drift higher possibly testing the recent 1159 high seen on September 3. As such, the follow strategy is recommended to take advantage of the high risk
reversal and express this view:

• 1) Buy 2m 1160/1240 Usd call spread in $10/leg

               Premium cost: 1.09% (ref vol 22.5 and 25.75)
               Breakeven: 1172.50
               Potential Max gain: 540k

Also, following the recent moves in the market, the vol curve in USD/KRW steepened considerably with the 3-month/1-year spread now trading at 4.25 vols. This is the highest we have seen the spread been while in the low in recent months has been close to 3 vols. In terms of the individual premium on the respective tenor, it represent a huge risk premium being priced in for the front date and taking that view the, spot will have to calm down it pace in the months to come, especially as we head towards the end of the year with the holiday seasons, the following calendar spread is recommended:

• 2) Sell 3m at-the-money straddle against buying 1-year atthe-money straddle in $50 by $25 vega neutral ratio

             Spot ref: 1111.50
             3-month fwd ref: 1112.50
             1-year fwd ref: 1115
             Premium cost: 3m at 17.7 vol - 7% Strikes 1112.50
             Breakeven 1034/1190
             1-year at 13.45 vol - 10.4% Strikes 1115 Breakeven 995 /1235

Based on the amount recommended above, if this spread comes off by 1 vol, the potential gain to unwind the spread is 96k and vice versa.