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FX swap funds gain popularity

The relatively new products play on the dollar’s strength

Sept 07,2018
Mr. Kim, a 40-year-old food importer, recently invested his stash of U.S. dollars in a sell-buy foreign exchange swap fund.

Because he uses the dollar for payments for his business, he couldn’t invest them in the riskier stock market. But with the dollar’s value appreciating, he didn’t want to just keep his cash in a bank account.

Six months after putting his money in the FX swap fund, he received roughly 1 percentage point more in interest than he would have received if he kept his dollars in his foreign currency account.

Sell-buy FX swaps have become popular recently among Koreans with large U.S. dollar holdings.

These derivative financial products convert the dollar to Korean won and invest it in local stocks and bonds. After a certain period, such as three or six months, investors receive their currency back in dollars.

With the U.S. dollar value strengthening, the dollar-won conversion forward premium is set at around 1 percent, which means just by signing up for an FX swap, investors get a profit of 1 percent.

If the Korean won is invested in blue chip bonds, investors can reap additional profits. For example, if the triple-A annual interest rate is 1.2 to 1.5 percent, an investor would receive interest returns of 2.2 to 2.5 percent. Currently, local bank’s foreign currency deposit interest is between 1.5 and 2 percent.

“The more the currency spread between the U.S. dollar and the Korean won widens, the higher the premium goes up,” said a bank official.

Until early June, the Korean currency was trading around 1,069 won ($0.95) to the greenback. Recently, however, it has depreciated to 1,110 won. Due to the strengthening of the dollar, in just three months the won’s value has fallen nearly 40 won. The currency instability created by emerging markets such as Turkey and Argentina has also helped the dollar.

KEB Hana Bank started selling FX swap funds in March last year. As of Sept. 6, they are worth $350 million.

“We have a lot of investors that have a large amount of foreign currency holdings,” said a KEB Hana Bank official. “We were able to create a fund under better circumstances [than other local banks].”

KEB Hana Bank is the nation’s leading commercial bank for foreign exchanges.

“While the yield isn’t exceptionally high, we have been receiving a continual stream of investment from investors who wish to get a slightly higher return,” the bank official said.

Among the 58 funds that it opened up since last year, 38 of them have already delivered returns to investors.

KB Securities is currently managing a FX swap fund for institutional investors. The minimum amount to invest in the fund is $5 million, putting it out of reach for all but the wealthiest retail investors.

According to the Bank of Korea, as of January, total foreign currency deposits in Korea amounted to $64.6 billion. Of the total, $53.9 billion are corporate deposits meant to hedge against foreign currency risk.


BY LEE HOO-YEON [lee.hojeong@joongang.co.kr]


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