KIKO

KIKO

KIKO(Knock-In, Knock-Out)

Simply ，There are two main types of barrier option: knock-in and knock-out options.

Technically, a knock-in option is a type of contract that is not an option until a certain price is met, so if the price is never reached it is as if the contract never existed.

A knock-out option is a type of barrier option and may be traded on the over-the-counter market.

https://www.stockpair.net/sp#trading2/page

Legal Dispute Around KIKO

How to hedge underlying asset price fall by option?

KIKO in Korean market

• Protective put

• Hold underlying asset + Long put option = Protective put
• However, this solution should need purchasing cost of put option.

• Zero-cost option

- KIKO was first introduced by city bank in the year 2000 and was sold to individuals ever since

- Sold to companies (medium sized) via banks in late 2007

• Trading strategy in one option is purchased and simultaneously a matching option of the same value is sold.
• This is KIKO’s zero-cost concept.

What is KIKO?

PRE-TRIAL SETTLEMENT

• KIKO(Knock-In, Knock-Out): a derivative that be made to hedge underlying asset’s price volatility risk.

Why was medium sized companies the target of KIKO?

DISCOVERY

Mediation

Conciliation

• Marketing performed was only targeted at medium-sized companies

- This was because medium sized companies had trouble with hedging compared to large companies.

• Medium sized companies thought that it would turn out to be a positive option for them as it did not cost them anything

Scale of KIKO among exporting companies

The controversial KIKO derivative contract

Knock-In + Knock-Out

Mis-selling

The financial institution sells financial instruments without informing them of the risks of selling goods.

Number of contracts carried out by banks

Knock In option

Lessons Learned from the KIKO Incident

How it all happened

Knock Out option

Investor Side

One of the causes of kiko is ignorance and apathy among investors. Most companies did not take proactive risks after contracting KIKO, a hedge rigging product.

You have to take care of yourself and take responsibility for their own risks. One should rightly appreciate what the products are, and what they are, and what they pay for their products.

Movement of currency

- the Korean currency faced depreciation from 1997 to 2007

- Dollar was valued at 1,200won in 2002 and faced depreciation of 6%. Dollar was valued at 930 won in 2007

- korean exporting companies had to worry about the depreciation of the currency.

- KIKO just had to be their last resort because it was a way they could avoid currency fluctuations without cost

Finiancial Institution Side

Who introduced KIKO at first?

How it all happened

The banks ought to recognize that they are obligated to protect small and medium businesses with relatively unilateral Counterpart, such as basic obligations (disclosure, product descriptions, etc.) through more ethical business operations. 

Banks should consider the interests of society and national interests, not their own interests.

Inventor : George Soros

Movement of currency

- subprime mortgage loan insolvency caused financial problems during mid 2008 and the whole world got to know about this.

- because of this the value of KRW started depreciating and the value of USD started appreciating

- after the bankruptcy of the lehman brothers, currency rose to 1,600 won

Knock-out option case in 1994

Underlying asset = USD/JPY FX rate

Government, Regulator Side

Kiko was traded on the sidelines, but the Financial Supervisory Service was unable to grasp the kiko problem at all.

To increase the transparency of derivatives, transactions of larger OTC markets may be reported.

The provision of provisions for the protection of the investor may be prescribed by law.

KIKO was designed to offer positive payoffs to the holder when the KRW moderately appreciated up to a certain predetermined rate; in exchange for these positive payoffs, the option holder should take negative payoffs when the KRW significantly depreciates.

In late 2007, KIKO option holders had to face losses from their holding positions because after the steady appreciation came depreciation at an accelerating pace.

Structure of KIKO