Hedging cost piles up for Korean exporters on stronger than expected USD gains

[Photo by Kim Ho-young]

South Korean exporters have upped hedging against the U.S. dollar in response to unfazed strength in the U.S. dollar, and the cost of hedging has been weighing over their financial books as depreciation of the Korean won widens.

According to data from Bank of Korea, the forward exchange accounts of domestic customers that include corporate hedges through lenders reached $4.94 billion at the end of June, up from $3.66 billion a year ago and $3.13 billion in the same period in 2020.

Hedging has increased in line with the gains in the U.S. dollar.

Companies engage in derivative trading normally over one year in line with their product cycle. Due to the bigger- and longer-than expected strengthening in the greenback – up 13 percent from 1,191.8 won on Jan. 3 to 1,371.4 won Monday, many could be making losses from their hedging.

The valuation of derivative products of top Kospi companies has declined in the first six months from the same period a year ago. According to half-year business report, the appraised value in Samsung Electronics’ currency forward contracts booked a red of 106.5 billion won in the first half, widened from a loss of 84.9 billion won ($62 million) a year ago-period. The appraised value in LG Energy Solution’s currency forward contracts fell to 64.8 billion won from 114.18 billion won.

“Since exporters must hedge currency risk, many not subject to disclosure would have seen losses,” said a bank official.

The profit and loss related to derivative products is divided into transaction income and valuation income. Most of the listed companies place them under valuation income, which means that losses from currency fluctuation does not immediately lead to cash outflow. Valuation losses, however, are reflected to their derivative product assets and give negative influence on their financial sheets.

“Even though losses from foreign exchange derivative products are not realized, we are under burden as they should be stacked up as reserves,” said an unnamed official from a listed company.

When a company confirms valuation loss and profit or the contract period of derivative product expires, the losses are taken out from its operating income, which decreases net profit.

According to data from Financial Supervisory Service, derivatives-related losses swelled over incomes of BHI and Sunic System by 7,800 percent and 526 percent respectively. MNtech showed such ratio at 80 percent TCC Steel 55 percent, TechWing 43 percent, and SAMT 37 percent.

Depending on the expiry of forward contracts, companies on the other hand can see profit if the dollar eases.

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