Its been known that Mr. Buffet is against derivative transactions. "Its a mass destructions", he claimed. Well, Mr. Buffet's view is proven. First, Subprime mortagage, which is a derivative of mortgage loan. And now KIKO options, which has brought down over 500 Small and Medium Enterprises in Korea, and other companies in Brazil, Mexico, and for a smaller part, in Indonesia. What has gone wrong? First of All, First half of 2008 has been very stable, and the outlook is promising for emerging market. But then the US crisis hit, and the impact is way above expectations, and depreciate emerging market currencies. Companies, who entered this structured product KIKO options, bet that the local currencies will not depreciate more than certain level, even they bet that local currencies will continue to appreciate. As a result, companies are obliged to deliver money more than they have received when they gained from the contract, and this has eaten their working capital, and therefore several of them have filed chapter 11. In Korea, some companies have filed a class action suit against banks, and according to some articles on the Internet, they have won, and therefore did not have to finish the contract. One of the reason is that the court has agreed that this contract is no longer rational as the currency depreciation and or volatility is way above expectation. Banks are now facing potential loss of around $1 billion. In Brazil and Mexico are even higher.
Same thing happen in Indonesia. The exporter companies claim that they use this instrument as a hedging. Well, I don't believe it. This is pure return enhancement. Companies are provided better cash flow than that of in the spot market, and therefore companies buy this product, and ignore all the risks that possibly existed. Due to crisis, companies are now in trouble, and banks is facing losses too, since they do this transaction back to back (pass on to other banks).
Then, what is KIKO options, or callable forward, or what not? Its a contract that provide customers with zero premium and a better rate (strike rate) then the spot market rate. If the strike rate <> spot market rate, customer will have to pay the difference twice as big as if they profit. This is obviously not a hedging instrument, but definately a speculative instrument.
Well? do you want to enter this product???
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3 comments:
Hi Indra, How are you. Do you still remember me? Old friend from SMA 39 Cijantung.
Where are you now? Long time no c or hear anything about you (except about your father hehehe).
Anak ude berape?
Iwan yah? Apa kabar boss? alhamdulillah bae bae aja. Gw sekarang kerja di bank boss. yah.. pengen sekolah lagi, jadi nulis nulis sambil belajar ngetik in english.. he he..
Anak gw udah 3 boss. tinggal di bilimun, kalimalang. lu sendiri gimana? let me know yah..
Anak gw juga udah tiga. Sekarang gw di Tronoh, mengais ilmu hehehe. Belum pinter juga nih soalnya.
Eh, ada kontak di facebook kagak? kayaknya ada juga temen-temen sma di sana.
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