As the market for single-stock leveraged exchange-traded funds (ETFs) based on Samsung Electronics and SK Hynix grows rapidly, derivative transactions hedging against extreme stock crashes are also surging, data shows.

According to Bloomberg, global investment banks have been rolling out over-the-counter derivative products known as "crash puts" targeting Samsung Electronics and SK Hynix.

A crash put is a type of insurance-like product created to prepare for extreme situations where the price of the underlying asset plunges by 50% or more in a single day.

Typically, single-stock leveraged ETF managers enter into swap agreements with investment banks to match twice the return of the underlying stock.

Under this structure, the asset manager pays fees and funding costs to the investment bank, while the investment bank guarantees twice the return of the relevant stock.

However, if the underlying stock plunges by 50% or more in a single day, the asset value of a 2x leveraged ETF effectively drops to zero.

In this scenario, as the ETF can no longer absorb the losses, a so-called "gap risk" arises where the investment bank that provided the swap agreement could be left holding the remaining losses.

To avoid this, investment banks are creating and expanding transactions for crash puts, which are derivative products that pass this risk on to other investors such as hedge funds.

Instead of betting that the stock will "not crash by 50% or more in a single day," investors receive high premiums, while from the investment bank's perspective, the structure allows them to shift the risk of an actual crash.

According to data obtained by Bloomberg, Goldman Sachs offered yields ranging from 14.2% up to 20% per annum on crash put products targeting Samsung Electronics and SK Hynix last May.

BNP Paribas was also reported to have launched 6-month maturity products based on the two stocks, offering premiums of up to 6.5%.

With the global leveraged ETF market growing to USD 250 billion, approximately KRW 350 trillion, derivative transactions of this nature are expanding correspondingly.

Natasha Cibley, alternative investment portfolio manager at Janus Henderson, said, "I have never seen demand for this product this high."

Critics also point out that the complexity and opacity of the derivatives market could pose a fatal threat to the financial system.

(Reported by Kim Minjeong | Video by Lee Eui-seon | Graphics by Lee Jung-joo | Produced by SBS Digital News)