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South Korean Court Upholds FX Option Contracts

A South Korean high court has rejected a chemical company’s suit to suspend currency options contracts sold by three banks, ruling that the banks did not act improperly in selling the products. The ruling could influence the outcome of several similar lawsuits.

The Seoul High Court upheld a lower court verdict against the move by KPX Fine Chemical Co. Ltd. to put on hold knock-in knock-out (KIKO) currency hedging contracts with Shinhan Bank, Citibank and Standard Chartered’s South Korean unit SC First Bank.

Local exporters bought the KIKO contracts to protect themselves from sudden increases in the won’s value. The contracts allow companies to sell dollars with a fixed won-dollar rate if the won moves within a certain range. If the won falls below the range, companies have to sell dollars below the market rate, leaving them exposed to large potential losses.

The KIKO contracts became an issue in the latter half of last year when the won fell around 30% against the dollar in the wake of the global financial crisis. Companies have argued that the banks failed to warn them clearly of the risks.

“There are some aspects in the structure that look quite disadvantageous to the buyer who had intended to hedge currency risks…but it is difficult to view the contacts as lacking fairness,” the High Court said in its ruling.

In some other cases, lower courts have ruled in favour of companies wanting to suspend the currency contracts to prevent any further losses. These are all being appealed by the banks.

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