Goldman Sachs taps into investors' appetite for Korean won with three currency-linked notes

By Emma Trincal

New York, Jan. 12 - Goldman, Sachs & Co. plans to price 0% currency-linked notes linked to the performance of the Korean won in an unusual deal that expresses a bullish view of the Korean currency relative to the dollar in a short-term horizon, according to a 424B3 filing with the Securities and Exchange Commission.

Goldman, which will price the deal on the behalf of Eksportfinans ASA, is also launching similar offerings reflecting the same bullish view on the Korean won: One such offering consists of 0% currency-linked notes linked to the performance of the Korean won relative to the euro; the other one represents 0% currency-linked notes linked to the performance of the Korean won relative to the Japanese yen.

The tenor for all the notes will be 12.5 to 14 months.

"There is a great divide in the currency world, and that is East versus West. East will do better than West with the exception of Japan," said Brian Kelly, chief executive officer and founder of Kanundrum Capital, a private investment company and a global strategy and investment research boutique in Rowayton, Conn.

The growth of Asian and emerging-market economies has helped the currencies in these countries, prompting investors to buy into Asian economies.

"We're bullish on emerging-market currencies, including the Korean won. We think the Korean won will appreciate especially against the dollar but also against the euro," said Matt Lloyd, chief investment strategist at Advisors Asset Management.

Three different notes

For the notes linked to the Korean won relative to the dollar, investors will receive par plus 110.5% to 130% of any increase in the exchange rate, with the exact participation rate to be set at pricing. Investors will be exposed to any decline in the exchange rate.

For the other two notes, investors will receive par plus 110.5% to 130% of any increase in the total exchange rate and will be exposed to any decline in the total exchange rate.

The filings introduce some complexity in how the "total exchange rate" is defined.

For the notes linked to the performance of the Korean won relative to the euro, the total exchange rate will equal the change in the dollar/Korean won exchange rate minus the change in the euro/dollar exchange rate.

For the notes linked to the performance of the Korean won relative to the yen, the total exchange rate will equal the change in the dollar/Korean won exchange rate minus the change in the dollar/yen exchange rate.

For structuring ease

The reason Goldman used the dollar for the calculation of the total exchange rate defining the performance of the Korean won versus the euro or versus the yen is purely technical, said a currency structurer at another bank.

"It's easier to structure it that way because these are dollar-denominated instruments. The exchange rate using the dollar facilitates the buying and selling of forwards," he said.

Naturally, the payout formula is simplified in the case of the notes tied to the performance of the Korean won versus the dollar. Investors in this third type of currency-linked note will simply receive par plus 110.5% to 130% of any appreciation in the won relative to the dollar.

BNP did it

Sebastien Galy, senior currency strategist at BNP Paribas, said, "We're bullish on the Korean won. This is a trade we've put on since mid-December. We've been long the won and short the yen. We've been long the won and short the euro. And we've been doing quite well."

Comparing the three different notes, Galy said that the potential for appreciation of the Korean won in relation to the yen is by far his favorite. "There is also potential for appreciation of the won versus the euro and to a certain extent versus the dollar," he said.

"Korea is doing quite well. Inflation will rise. They will have to tighten," said Galy, explaining why he is confident in the Korean currency's strength in general.

Yen bear

Galy said that he is especially bearish on the yen because "Japan needs to export more. The only way to boost exports is through a depreciation of the yen since they can't do much on the monetary policy side."

He added that the yen decline will boost other currencies, notably in Asia.

"The yen will be a cheap currency. We're seeing an evolution in the yen carry trade. Instead of selling the yen to buy commodities, people will sell the yen to buy Asian currencies, including the Korean won," he said.

A call for calls

Kelly agreed with the underlying macroeconomic theme expressed in the structured notes but questioned the soundness of using a debt instrument to express a bullish view on the Korean currency.

"Why wouldn't you do that with a spot foreign trade? Or even an option. You could certainly buy a call on the Korean won. You would get more leverage than [1.105 to 1.3] unless they would let you borrow money to buy the notes, in which case you'd have an additional layer of leverage. I guess this would be for a client who needs to use a debt instrument rather than an option. It seems like a customized structure," Kelly said.

But Kelly agreed with the investment idea contained in the notes, saying that he is bullish on the Korean won, especially relative to the euro.

Euro alert

"The euro is particularly fragile given the credibility and budget crisis that's going on in Greece. This crisis will spread to the euro. I wouldn't want to be long the euro right now," he said. "Being long the Korean won and short the euro is a good trade. The Korean won will do much better than the euro, especially if the Greece issue spreads out."

Yen decline

Kelly said that he also is bearish on the yen.

"You could be short the yen against every currency," said Kelly, adding that one of his successful trades recently has been to be long the dollar and short the yen.

"Both the Bank of Japan and Japan's finance minister have said that they would prefer a weaker currency. They will do more quantitative easing, which is like printing more money and the equivalent of devaluating," he said.

Dollar bull

However, Kelly was more skeptical regarding the currency-linked note that expresses a bullish view on the Korean won in relation to the dollar.

"The dollar can go much, much higher," he said. "If the global economy is doing better, the interest rates differential should favor the U.S. as we will tighten rates. This will benefit the dollar especially versus Japan. I expect money to flow into the U.S. for higher yield. So I wouldn't particularly be in favor of being long Korean won and short the dollar. It wouldn't be my first trade, because the dynamic isn't there. There are better trades than this one," Kelly said.

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