Unprecedented Exchange Rate Volatility Hits South Korean Exporters Hard

South Korean exporters are reeling from significant financial setbacks due to the abrupt depreciation of the won, with losses from foreign exchange hedge contracts surpassing 1 trillion won last year, as disclosed by the Financial Supervisory Service. This unexpected downturn in the won's value, spurred by global emergencies, has particularly impacted export-dependent companies.

Understanding the Impact of Foreign Exchange Hedging

Foreign exchange hedging is a strategy employed by export companies to safeguard against the risks posed by fluctuating exchange rates. Through instruments such as currency forwards, businesses aim to secure exchange rates for future transactions, thereby insulating their revenues and costs from unfavorable currency movements. However, when the won's value plummets beyond expected thresholds, these protective measures can lead to substantial financial losses.

The Worsening Situation

The won's value saw a dramatic fall from 1,316.8 won at the end of September to 1,472.3 won by December's close last year, exacerbating the financial strain on companies. The Financial Supervisory Service's electronic disclosure system revealed that listed companies incurred losses from currency-related derivatives, including currency forwards and futures, totaling 1.1532 trillion won for the previous year. A notable example is Samsung Heavy Industries, which reported a significant one-time loss of 624.6 billion won following the termination of a contract with Russia.

Looking Ahead

As global geopolitical crises continue to unfold, the instability in exchange rates is expected to persist, further increasing corporate hedge costs. Wi Jae-hyun, a researcher at NH Futures, commented on the ongoing uncertainty affecting U.S. Treasury rates and the dollar, predicting its persistence through the first half of the year.