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Foreign Exchange

KiKo: Time for a new option

I was amazed to see reports in the national press about KiKo (knock in-knock out) options, which are being blamed for some hefty losses by Korean corporates.

This disappointed me, because until recently I was planning a feature about how well the banks have served their clients by tailoring products to manage their FX risk more efficiently.

Given what’s gone on in Mexico, Brazil, Korea and, most recently, with Citic Pacific, that is going to have to be rethought. But I reckon that the banks, although they will be pilloried, are not wholly to blame. Rather, it’s another take on the trading game Go for broke I wrote about last week. Many corporate treasurers have long over-hedged so that they get a free option. But as we always write in the weeklyFiX, you don’t get nothing for nothing, as they are finding out.

Anyway, we are currently devising a new option. Called the RoRo (roll on-roll off). These, just like the ferries they are named after, will work well until they sink.

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