It has been shown that “exchange rate (FX) trigger” contracts signed by domestic companies with foreign financial institutions reached the level of hundreds of millions of dollars. Since most of these FX contracts are designed to be triggered when the exchange rate of won and dollar exceeds 1,490 won, there are voices of concern that our companies may suffer significant losses.
According to data from the Financial Supervisory Service obtained by the Seoul Economic Daily through Lee In Young and the Democratic Party's office on the 2nd, the total number of FX trigger contracts signed by two foreign banks with domestic companies was 28, or 44.8 million dollars.
FX triggers are a type of derivative that export companies enter into with financial institutions to hedge exchange rates. If the exchange rate of won and dollar remains below a certain level promised in advance, banks exchange it at an exchange rate favorable to companies, but once it exceeds a certain level (knock in), a condition is triggered for companies to sell dollars to banks at an exchange rate lower than the market exchange rate. The structure is similar to KIKO (KIKO) products that shook Korea during the 2008 financial crisis. For example, assuming there is a $10 million contract with trigger conditions set at 1,490 won per dollar, the company must sell 10 million dollars to the bank at the pre-set sale price as soon as the exchange rate exceeds 1,490 won.
The problem is that the majority of domestic companies set a trigger exchange rate of 1,490 won per dollar. According to the contract signed by domestic automobile company A with Bank B, the contract triggered when the exchange rate of won and dollar entered 1490 won was 30 million dollars, and the contract triggered at 1,500 won reached 10 million dollars. Bank C was found to have signed contracts worth $2.4 million each for 1489.5 won and 1495.5 won. Considering that this survey only counted contracts signed with only 2 foreign banks, the total FX trigger contract is likely to reach at least hundreds of millions of dollars. The highest exchange rate of won and dollar this year was on April 9, when it hit 1487.6 won during the day, and it has never crossed the 1490 won line since then. Experts point out that if the exchange rate of won and dollar crosses the 1490 won line this year, small and medium-sized enterprises with poor shock absorption capacity may suffer large-scale losses.
? [Exclusive] If the exchange rate exceeds 1,490 won... Second, I'm worried about Kiko
