The high exchange rate (weakening won) was seen as a typical good thing for export companies such as automobiles and semiconductors. This is because it can increase price competitiveness by having the effect of lowering the price of Korean products relatively in the global market. Also, when the dollar received after selling goods from overseas is exchanged for won, if the exchange rate is high, it can be converted to more won, which increases sales and operating profit on financial statements.
Recently, however, this common sense has been falling apart. This is because the majority of export companies are importing raw materials through the global supply chain, and the state of the industry is changing due to the fact that our share of overseas production also increases, and the weakening of the won is completely impacted by the weakening of the won.
In addition, as the uncertainty in the foreign exchange market grows and the exchange rate soars, hedging costs also rise significantly. A typical example is an “exchange rate (FX) trigger” contract, which is an exchange hedge product that companies sign up for. This product is designed to sell dollars for a specific amount agreed in advance when the exchange rate of won and dollar reaches a pre-agreed range (exchange of money earned from exports into won), and it was found that many domestic companies signed contracts for the 1490 won line as marginal lines.
For example, suppose export company A signed a contract to sell dollars for 1,450 won when the exchange rate between won and dollar is 1400 won per dollar. If this contract is maintained, export companies can hedge against exchange rate fluctuations by selling dollars at a higher price. The problem occurs when the exchange rate exceeds the trigger range agreed in advance by the exporting company and the bank. Assuming that this company has signed an FX trigger contract that requires a sale of 10 million dollars to 1,400 won per dollar if the exchange rate exceeds 1,490 won, the company is bound to suffer large-scale exchange losses.
In fact, according to Lee In-young and the Democratic Party's office, a large domestic company A signed a $40 million currency option contract with foreign financial company B by setting 1490 won and 1,500 won as trigger zones, respectively. Also, some companies signed up for a $4.8 million product with Bank C set as trigger ranges of 1485.9 won and 1495.5 won. Recently, the exchange rate threatened to reach 1480 won, and since they are on the verge of entering the trigger zone, it seems that major export companies have lost their footing.
A financial industry insider said, “Export companies signed up for FX trigger products because they saw that the exchange rate of won and dollar would not rise to the 1500 won level, but the recent sharp rise in exchange rates has led to a situation where they have entered a loss zone.”
There are also assessments that if the exchange rate rises further, the “KIKO (KIKO)” situation, which caused significant damage to small and medium-sized export companies during the global financial crisis, could be repeated. As the name suggests, Kiko is a currency option contract with “knock-in (knock-out)” and “knock-out (knock-out)” conditions at the same time. At the time of the 2008 financial crisis, the exchange rate surpassed the option baseline of 1,300 won and soared to 1,500 won, but small and medium-sized enterprises that signed up for Kiko products had to sell dollars for 1100 to 1200 won, which had been agreed in advance, causing large-scale losses. Large companies that have signed up for FX Trigger can afford to find various ways to recover losses, but it could be another critical blow to small and medium-sized enterprises following Kiko.
A foreign exchange derivatives expert said, “There are probably not a few major export companies that set the profit range from rising exchange rates between 1380 and 1450 won,” and “as a result, exchange hedges may eat away at exchange profits as exchange rates are formed at a higher level than expected at the end of the year.”
However, financial institutions have explained that even if an FX trigger contract is triggered, the loss to companies is not significant. A Bank C official said, “This derivative product is a product that limits the occurrence of margin calls (additional margin requirements),” and “I know that companies have also designed a multi-layer exchange hedge structure, so the loss is not significant even if the trigger is triggered.”
