On July. 4, at the KB Kookmin Bank dealing room in Yeouido, Kim Dong-wook, the manager in charge of promoting new growth in the Capital Market Sales Department, answered questions about South Korea’s new policy to advance the foreign exchange market system that started this month. He explained that making it easier for foreign investors to trade in Korean won could bring more investment money into not only the foreign exchange market but also the stock market, including KOSPI.
The newly adopted advancement of the foreign exchange market system extends its operating hours until 2 a.m. and allows overseas financial institutions to participate in the S. Korean foreign exchange market. If foreign exchange inflows become more freely, foreign exchange reserves will increase, and the overall investment environment of the economy will improve. In the long term, the stability of the capital and financial markets will be strengthened.
Kim, a veteran foreign exchange dealer with over 20 years of experience, has been working as the manager of the foreign exchange dealing team at Kookmin Bank since 2012, handling various tasks including FX spot (spot exchange transactions), foreign exchange swaps, and non-deliverable forwards (NDF). Last year, he was named ‘FX Dealer of the Year’ by the Korea Forex Club, an association of foreign exchange dealers in the Seoul foreign exchange market.
Kim once assessed that the Korean foreign exchange market was relatively weaker than other countries. However, the situation changed during the COVID-19 period, when the market’s soundness improved.
“Right after COVID-19, the value of the won plummeted, similar to a financial crisis,” he said. “But with strengthened regulations and quick liquidity supply from the foreign exchange authorities, along with the Korea-U.S. currency swap agreement, the losses were contained quickly.”
As the market became more stable, the status of the won also rose. The won is already establishing itself as an international currency in some Asian countries.
“When I went on a business trip to Taiwan last May, the won was being used as a ‘proxy hedge’ tool for Taiwanese currency,” Kim said. “I had heard about it through industry people, but it was surprising to confirm it directly through conversations with local dealers.”
Typically, currency hedging uses the domestic currency of each country. For example, if a Taiwanese investor expects a depreciation of the Taiwanese dollar (an increase in the exchange rate) and needs to buy 1 USD in a month, they would incur losses if the exchange rate rises. In this case, the investor can hedge the currency risk by entering into a forward contract to buy USD at the desired exchange rate in a month.
However, for currencies with low liquidity like the Taiwanese dollar, entering into forward contracts in the desired amount is not easy due to low trading volume.
In this case, investors can use the Korean won, which has similar movements and abundant liquidity, to enter into an NDF (Non-Delivery Forward) contract to buy USD at a specific monthly exchange rate, thereby hedging the currency risk. This investment technique is called ‘proxy hedging.’
An NDF is a type of forward contract where the principal amounts are not exchanged at maturity. Instead, the difference between the agreed-upon exchange rate and the spot rate at maturity (the fixing rate) is settled in a specified currency, usually USD. Since only the difference is settled, NDFs allow for large transactions with a smaller capital outlay compared to regular forward contracts.
“The fact that the won is used to hedge domestic currency in Taiwan means that the won is trusted that much,” Kim said. “I can feel that the position of the won has changed.”
Kim believes that the status of the won will rise further with the advancement of the foreign exchange market system. “The KOSPI and other stock markets connected to the foreign exchange market also have the conditions to develop into advanced markets with abundant trading volume. With institutional foundations in place, the foreign exchange market will grow even more,” he said.
