Anybody care to comment on this... Mikeg ---------- Forwarded message ---------- Date: Fri, 9 Jan 1998 08:24:58 -0500 From: Daniel Holly <[EMAIL PROTECTED]> Subject: DERIVATIVES in ASIA HOW EXOTIC DERIVATIVES TOOK DOWN KOREA'S ECONOMY BY JOHN CRUDELE [From the NY Post] ------------------------------------------------------------------------ THIS column is about gambling. More specifically, it's about how Korean banks and brokerages may have gotten themselves into the deep mess they are now in by placing nervy bets on their currency's performance against the U.S. dollar. The column is also about how American taxpayers may right this very minute be paying off these Korean gambling debts. <<<< Through the dollar stabilization fund, the IMF & World Bank>>> Paying off gambling debts, of course, wouldn't sit well with Congress. So the official line from the Federal Reserve and the White House is that Koreans took out loans that they now can't repay because their currency and economy suddenly took a turn for the worse. Hey, we can all sympathize. Sometimes things happen that are beyond our control. The Koreans are no different. But before another penny is earmarked for the Korean bailout, Americans should demand an accounting of a derivative security called the "undeliverable forward." There are lots of esoteric made-up securities, also known as derivatives, floating around out there. And Korean investors were probably involved in all of them. But these "undeliverable forwards" are tricky, so pay attention. These "undeliverable forward" contracts are a bet, nothing more, on how two currencies will move in relationship to one another by some time in the future. Six months. A year. The bettors can let the contract run for as long as they want, but the expiration date is set on each contract. And it really is nothing more than a bet, a wager, something that should be done at the tables in Vegas rather than on Wall Street. It works like this. Lets say, Bank XYZ of San Diego believes the U.S. dollar will rise in value and Bank ABC in Seoul really, really believes that the Korean won - that country's currency - is about to take off. The two sides enter into a derivative contract making their respective wagers. Typically the bet is many millions of dollars. But here's the key to it all. Under normal circumstances, if the Korean bank comes out the loser it would just ship the difference in value to the American bank in the Korean currency, the won. But that doesn't happen in these "undeliverable forward" contracts. Because the American bank doesn't want the thinly traded, weak-in-the-knees Korean currency, the terms of the "undeliverable future" contract specifically state that the trade will be settled for cash and in dollars. So here's what some experts on Wall Street suspect happened. The Korean currency got hammered a few months ago when the Korean government refused to fight speculators who were taking it lower. That, of course, made the Korean banks betting on the won in these "undeliverable future" contracts big losers. But the Korean banks, already down on their luck, couldn't come up with the dollars to pay off their bets to the Americans. Too bad, you say? They should pay anyway? Well, if this is what was happening, it's really too bad for the American banks and companies that used this device to hedge against currency risk. If the Koreans can't pay, they can't pay. The Americans will get stiffed. And if they've already booked these trading gains as profits - well, they'll have to unbook them. Nobody - except perhaps the Fed - knows how much exposure the Koreans have to these "undeliverable forward" contracts. But the best guess is that $48 billion is the total amount Koreans have invested in all derivatives - just short of the current size of the whole Korean bailout. Experts tell me there is one way out of the dilemma. The American banks could roll these undeliverable contracts over for another period of time.. But, of course, every solution in the Asian crisis causes a new dilemma.
