The KRW has rallied significantly in the past three months; typically this would mean sharply lower implied vol and skew.
KRW implied vol (1m to 1y) is in the upper half of the 5-year range whereas 25d risk reversals are at the bottom end.
Risk reversals are a cheaper way to gain USDKRW upside exposure compared to owning USDKRW calls outright, especially with KRW strength looking a bit overextended.
Favour optionality to directional trades. We are inclined to position for a partial retracement of the down move through call spreads, as calling the bottom is difficult and adding directional spot exposure is risky at the moment.
Call spreads are preferred to vanilla structures given elevated skew and favourable cost reduction.
A 3m 25d delta risk reversal (1158/1068 strikes) costs 0.20% of USD notional. Alternatively, the strikes for a zero cost risk reversal are 1159/1076 respectively. Losses are unlimited below the lower strike.