[Song Seungseop's Financial Light] Why 'KIKO' from 14 Years Ago Has Been Recalled

Over 900 Companies Suffered 3 Trillion Losses Due to 'KIKO'
At the National Assembly Audit, "Recent TRF Products Also Resemble KIKO"

Finance is difficult. It is filled with confusing terms and complex backstories intertwined. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and consistently follow the flow of money, a foundation of financial knowledge is essential. Accordingly, Asia Economy selects one financial issue each week and explains it in very simple terms. Even those with no financial knowledge can immediately understand these ‘light’ stories, lighting a bright ‘fire’ of finance.

On September 8, 2008, at the National Assembly Library in Yeouido, Seoul, about 200 small and medium-sized enterprise representatives attending the "Currency Hedge Damage Countermeasure Committee Public Hearing" hosted by the Democratic Party urged measures for the KIKO issue.

[Asia Economy Reporter Song Seung-seop] “Products similar to KIKO are being sold.” Last week, the term ‘KIKO’ was mentioned during the National Assembly’s Political Affairs Committee audit. Concerns were raised about a product called ‘Target Return Early Redemption Forward (TRF)’ being sold by banks. Lee Yong-woo, a member of the Political Affairs Committee from the Democratic Party of Korea who raised the issue, even said, “There is a high possibility it could become a second KIKO.” So, what is KIKO?

KIKO was a foreign exchange derivative product launched in the early 2000s. The name KIKO comes from the first letters of Knock-In and Knock-Out. Knock-In means a predetermined condition is ‘activated,’ and Knock-Out means the condition is ‘nullified.’ If the exchange rate stayed within a certain range, one could sell dollars at a pre-agreed contract rate. This eliminated the risk from exchange rate fluctuations.

The problem arises when the exchange rate rises or falls sharply. KIKO applies the Knock-Out condition when the exchange rate drops significantly, nullifying the contract itself. Conversely, when the exchange rate exceeds a certain level, Knock-In occurs. If the exchange rate enters the Knock-In zone even once before maturity, the company had to sell more than twice the contract amount to the bank. While the company’s profit was limited, the risk they had to bear was unlimited, making it an extremely high-risk product.

Nevertheless, KIKO was sold intensively in 2007. Since the exchange rate was falling, export companies mainly purchased it to avoid foreign exchange losses. Especially small and medium-sized enterprises (SMEs) that had no way to respond to exchange rate fluctuations bought KIKO heavily, believing that the exchange rate would not rise dramatically. Banks selling KIKO products at the time often emphasized safety and failed to properly inform about the risks.

KIKO caused problems starting from the 2008 global financial crisis. The US subprime mortgage crisis shook the international financial market. As foreign investors began to prefer safe assets and withdrew investments, the exchange rate soared. The Lee Myung-bak administration continued a high exchange rate policy, claiming that a high exchange rate would help exports, causing the won-dollar exchange rate to break through the 1,400 won level from around 1,100 won.

When the exchange rate rises, export companies generally profit, but companies subscribed to KIKO were exceptions. The exchange rate surged beyond expectations, entering the Knock-In zone, forcing companies to pay huge sums to banks. About 50 highly competitive SMEs suddenly went bankrupt. Subsequently, around 900 companies suffered losses, with damages exceeding 3 trillion won.

Financial Supervisory Service Governor Lee Bok-hyun is attending the National Assembly's audit of the Financial Supervisory Service held on the 11th, responding to questions from lawmakers. Photo by Yoon Dong-joo doso7@

During this audit, concerns were raised that the recently widely sold TRF is similar to KIKO. TRF is a financial product that hedges exchange rate fluctuation risks like KIKO. It limits customer profits and the contract can be terminated early. In return, subscribing companies can trade at exchange rates higher than usual. TRF’s risk increases as volatility expands. By design, the losses a company can incur are unlimited. Since 2019, TRF sales have totaled 22 trillion won.

Rep. Lee criticized, “In the past, KIKO was sold as a hedging product with no cost despite costs occurring, causing huge damage to companies, and now similar products to KIKO are still being sold.” He added, “The product description states that the bank’s margin is included in the customer exchange rate and that customers do not bear additional fees, which is similar to the no-margin situation during KIKO.” He pointed out, “This wording can mislead consumers into thinking there are no costs.”

However, financial supervisory authorities maintain that KIKO and TRF are fundamentally different products. Lee Bok-hyun, Governor of the Financial Supervisory Service who appeared at the audit, said regarding TRF, “KIKO was traded speculatively without actual exposure to the underlying asset, but TRF is traded within limits with foreign exchange exposure. Leverage trading is prohibited, so no additional leverage occurs.”

Governor Lee also responded, “I agree with the criticism about whether financial institutions properly informed customers about fees,” and said, “We will review matters related to product operation.”

This content was produced with the assistance of AI translation services.