Loss From Currency Option Derivatives Snowballing
By Yoon Ja-young
Staff Reporter
Concern over small exporters' loss from currency option derivatives other than knock-in knock-out (KIKO) products is growing. Small businesses signed to such products to hedge against a falling won-dollar rate, but the careful preparation is only pushing them into bankruptcy as the Korean won weakens against the greenback.
A number of small and medium-sized firms announced recently that they have sustained huge losses from currency option derivatives such as `Snow Ball' and `Pivot.' Most such complicated currency option products were originally developed by global investment banks.
According to the Financial Supervisory Service, five exporters and four banks signed to Snow Ball as of the end of August, sustaining 39.7 billion won in losses as the won-dollar rate soared.
Snow Ball is a currency option product like KIKO, but is more speculative. While KIKO sets the range of foreign exchange rate, Snow Ball sets a fixed foreign exchange rate each month. If the rate falls below the rate in the contract, the business will gain. If it rises above it, however, the business will sustain a loss, having to buy expensive dollars in the foreign exchange market and selling them cheaply to the bank. Generally, it incurs gain or loss around five to ten times bigger than in KIKO products.
Win4Net, a security solution company, for example, had to sell its headquarters building as it sustained 5 billion won in losses from a Snow Ball contract. C-motech, a wireless Internet equipment manufacturer, had its CFO quit and is going through a lawsuit by small shareholders due to the loss from a Snow Ball and four KIKO contracts. Both were leading exporters making solid growth each year.
Pivot, another currency option derivative, incurs a loss when the exchange rate goes below or above the bracket. Taesan LCD, a semiconductor company, had to file for bankruptcy due to losses from Pivot. The firm subscribed to Pivot to make up for the loss incurred from KIKO options, but the more risky product only ended as a bigger loss.