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KIKO Crisis Kicks Korean SMEs

The crisis over Knock In Knock Out (KIKO) currency options sold to Korean small to medium enterprises (SME) is escalating. A weakening Korean Won, now approaching five year lows, is resulting in further losses by SMEs who had bought KIKO options (effectively range options) on the erroneous expectation of a stable US$/KRW exchange rate.

Taesan LCD, an electronics supplier, went into bankruptcy protection last week after losing KRW280 billion ($228 million) from KIKO options and other currency derivatives bought since October 2007. Hana Bank, which sold the derivatives to the SME, reportedly fired two foreign exchange executives over the transactions.

Another SME, Win4Net Co, was forced to sell its corporate headquarters to raise capital to fund its KRW4.9 billion in currency derivatives losses, according to Maeil Business Newspaper. Two Kosdaq-listed firms, IDH, and SAMT, have suffered KIKO losses that exceeded their paid-in capital, notes the Financial News.

Hyundai Futures last month estimated KIKO losses by SMEs of KRW1.31 trillion ($1.1 billion) but the Won has weakened by a further 5% since then. As previously reported in Squawkbox, lawsuits are being considered against local banks for alleged mis-selling of the product and against international banks for structuring them for sale via local bank distributors.

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