Korea FX Specialist Type II cheat sheet

Quotation convention (KRW): a rate such as USD/KRW 1,350 means 1 USD = 1,350 KRW; KRW per unit of foreign currency is the standard domestic market convention.

Cross rate from two KRW rates: EUR/USD = (KRW per EUR) ÷ (KRW per USD); always divide by the rate whose base is the priced currency's quote currency.

Bid/ask spread: dealer buys base currency at bid, sells at ask; spread % = (ask − bid) ÷ ask × 100; KRW/USD quotes normally carry 2-decimal pips for USD.

Appreciation of KRW = numerically lower USD/KRW; a move from 1,300 to 1,250 is a 3.85% KRW appreciation, computed as (1,300 − 1,250) ÷ 1,300.

Forward rate parity: F/S = (1 + i_KRW) ÷ (1 + i_USD); if KRW rates exceed USD rates, USD/KRW forward trades at a premium (higher than spot).

Interest rate parity arbitrage: borrow in the low-rate currency, convert at spot, invest at the high rate, sell proceeds forward; profit exists when the forward premium differs from the rate differential.

Balance of payments: current account surplus tends to support KRW appreciation; capital outflow (residents investing abroad) tends to weaken KRW; the FX rate reacts to the combined supply-demand balance.

Market structure in Korea: interbank trading is broker-mediated and quote-driven; the Seoul FX market operates 09:00–15:30 local time for KRW/USD onshore dealing.

Real effective exchange rate (REER) = nominal effective rate adjusted by relative consumer prices; a rising REER signals lost export price competitiveness.

The Foreign Exchange Transactions Act (FETA) is the basic statute; the Foreign Exchange Transactions Regulations (Ministry of Economy and Finance decree) and the Foreign Exchange Transactions Guidelines (Bank of Korea) supply operational detail.

Residents vs non-residents: FETA obligations attach mainly to residents; a non-resident is a person whose principal place of business or residence is abroad, and transactions with non-residents are generally freer.

Capital transactions require prior report or permission (e.g., overseas direct investment, foreign borrowing), while current transactions (trade settlement, remittances) are generally free unless specified.

Overseas direct investment: report to a designated FX bank if within the automatic approval limit; above the limit requires approval from the Ministry of Economy and Finance or the Bank of Korea.

Foreign borrowing by residents must be reported; use of proceeds is restricted (no domestic real estate, no domestic-currency lending), and maturity/interest terms must meet the guidelines.

Sanctions: violations can bring correction orders, restrictions on FX business, and criminal penalties; administrative fines apply to reporting failures under the FETA penalty schedule.

Real-name and purpose verification: FX banks must verify the identity and the purpose of remittances and deposits, and retain records; structuring to avoid reporting thresholds is prohibited.

Reporting to the Bank of Korea: FX banks report large or unusual transactions, and residents must report certain capital transactions through the designated bank within the prescribed period.

Foreign currency deposits are held with domestic banks in convertible currencies; deposit insurance coverage applies per depositor per bank up to the won-equivalent limit under the Depositor Protection Act.

Reserve requirement on FX deposits: the Bank of Korea sets marginal reserve ratios on foreign currency deposits, differentiated by maturity (longer maturity typically lower ratio).

Interest on FX deposits accrues on the foreign currency principal; conversion to KRW for withdrawal uses the bank's posted telegraphic transfer buying rate unless the account is denominated in KRW.

Non-resident won accounts: a non-resident may hold a won account convertible to foreign currency; resident won accounts and non-resident won accounts are subject to different convertibility rules.

Withdrawal in cash of foreign currency is limited to amounts reasonably needed; large cash withdrawals trigger reporting and anti-money-laundering checks.

FX bank funding: banks borrow abroad and swap into KRW; the FX swap implied rate and the cross-currency basis determine the effective KRW funding cost.

Foreign currency time deposits may permit early withdrawal at a reduced rate; automatic renewal terms and minimum balance rules are set by each bank's product terms.

Conversion between currencies inside an FX account is a foreign exchange transaction; the bank applies its posted cross rate and may charge a spread.

Payment methods ranked by exporter risk: advance payment (lowest), letter of credit, documentary collection (D/P, D/A), open account (highest).

Letter of credit: the issuing bank's irrevocable undertaking; documents must comply strictly with UCP 600, and banks deal in documents, not goods.

UCP 600 key points: 21 calendar days for presentation after shipment unless the credit states otherwise; five banking days for examination; a credit is independent of the underlying sales contract.

Documentary collection: D/P releases documents only against payment; D/A releases against acceptance of a time draft, so the exporter bears the buyer's credit risk.

Bill of lading: an ocean B/L is a document of title; an air waybill is not negotiable; a clean on-board B/L evidences shipment and supports the exporter's claim.

Trade finance instruments: export bill negotiation (purchase with recourse), export bill discount, import usance (deferred payment) L/C, and bank guarantees.

Foreign exchange trade-based verification: exporters must repatriate proceeds within the period set by the Foreign Exchange Transactions Regulations for the settlement method used.

Incoterms 2020: FOB risk passes when goods are on board; CIF adds cost and insurance to the named destination port, but risk still passes at shipment.

Spot settlement: T+2 for most currency pairs; USD/CAD is T+1; KRW/USD onshore spot settles T+2 with a same-day (value today) and next-day (tomorrow) market.

Forward: a contract to exchange currencies at a fixed rate on a future date; used to hedge known receivables or payables; non-deliverable if the currency is restricted.

FX swap: simultaneous spot and forward in opposite directions; the swap points = forward − spot, driven by the interest rate differential.

Currency option: buyer pays premium for the right (not obligation) to buy (call) or sell (put) a currency; break-even = strike ± premium.

NDF (non-deliverable forward): cash-settled against a fixing rate, typically used for restricted currencies; settlement amount = notional × (fixing − contract rate) ÷ fixing.

Value at risk (VaR): estimated maximum loss over a horizon at a confidence level; a 1-day 95% VaR of 100 million KRW means losses exceed that amount on about 5% of days.

Hedging decision rule: match the hedge ratio to the exposure; a forward locks the rate exactly but forfeits upside, while an option preserves upside at a premium cost.

Stop-loss and position limits: dealers operate within bank-set open position limits; the Bank of Korea monitors banks' FX positions and requires reporting of large exposures.

Individual remittance abroad: a resident may remit freely up to the annual limit (currently USD 50,000) for current transactions; amounts above require documentation of purpose.

Overseas study expenses, medical costs, and family support may be remitted beyond the basic limit with supporting documents; tuition is paid directly to the institution where required.

Overseas real estate purchase by residents requires reporting to an FX bank and is subject to restrictions on the source and use of funds.

Foreign currency cash: residents may carry out up to USD 10,000 in foreign currency without declaration; amounts above must be declared to customs.

Gift transfers to non-residents and inheritance-related remittances follow separate reporting rules; the FX bank verifies the relationship and purpose.

Payment cards abroad: card spending is an FX transaction settled at the card issuer's rate; the annual card usage limit is separate from the remittance limit.

Exchange-rate application for individuals: buying foreign currency uses the bank's telegraphic transfer selling rate or cash selling rate; cash rates carry a wider spread than telegraphic transfer.

Anti-money-laundering: remittances above threshold amounts and suspicious patterns are reported to the Korea Financial Intelligence Unit; splitting remittances to avoid limits is prohibited.

Direct vs indirect quote: Korea uses direct quotation (KRW per foreign unit); an indirect quote expresses foreign currency per 1 KRW, the reciprocal of the direct rate.

Pip value: for USD/KRW with a 0.01 pip, 1 pip on USD 1,000,000 equals 10,000 KRW; for EUR/USD a 0.0001 pip on EUR 1,000,000 equals USD 100.

Real exchange rate = nominal rate × (foreign price level ÷ domestic price level); it measures competitiveness-adjusted relative prices.

Purchasing power parity: absolute PPP equates price baskets; relative PPP predicts exchange rate change ≈ domestic inflation − foreign inflation.

Exchange rate pass-through: KRW depreciation raises import prices with a lag, feeding domestic inflation; the pass-through is partial, not one-for-one.

Market participants in Korea: authorized FX banks, non-bank FX brokers, the Korea Exchange (KRX) for listed FX derivatives, and the Bank of Korea as market operator and regulator.

KRX-listed USD/KRW futures: contract unit USD 10,000, quoted in KRW per USD; margin trading with daily mark-to-market settlement.

Carry trade: borrow low-yield currency, invest in high-yield currency; profit equals the interest differential minus any depreciation of the invested currency.

Institutional hierarchy: FETA (National Assembly statute) → Enforcement Decree (Cabinet) → Foreign Exchange Transactions Regulations (MEF) → Foreign Exchange Transactions Guidelines (BOK).

The Minister of Economy and Finance may suspend FX transactions or impose emergency measures for a defined period when the balance of payments is threatened.

Designated FX bank: a bank authorized to conduct FX business; its designation can be revoked for serious violations, and the scope of business is defined by the designation.

Payment and receipt in foreign currency between residents is generally restricted unless permitted, because domestic payments must be in KRW.

Capital transaction reporting categories: prior report, ex-post report, and exemption; the classification depends on the transaction type and amount.

Derivatives transactions by residents with non-residents must be reported; speculative derivatives without an underlying real exposure may be restricted.

Foreign currency loans between residents are restricted; foreign borrowing from abroad must be reported and cannot be used for domestic purposes.

Record retention: FX banks must keep transaction records for the period set by the regulations (typically 5 years) and produce them on regulatory request.

Account types: current (checking-like), savings, time deposit, and non-resident won account; each has distinct convertibility and reporting treatment.

Deposit protection: foreign currency deposits are protected in KRW-equivalent value up to the per-depositor limit; the protection applies to principal and accrued interest.

Reserve requirement mechanics: the BOK sets a marginal reserve ratio on FX deposits; the ratio is applied to the increase in deposits over a base period.

Interest rate setting: FX deposit rates track the currency's benchmark (SOFR for USD, EURIBOR for EUR) plus a bank spread; KRW conversion adds FX rate risk for the depositor.

Foreign currency cash deposits: banks verify the source of cash and may reject large or suspicious cash deposits; counterfeits are confiscated.

Non-resident won account convertibility: balances may be converted to foreign currency up to the amount of eligible won funds; conversion is reported.

Dormant accounts: after a defined period of inactivity, the balance is transferred to a dormant account management process and can be reclaimed with identity verification.

FX bank liquidity: banks hold foreign currency liquidity to cover short-term foreign liabilities; the BOK monitors the FX liquidity coverage ratio.

L/C confirmation: a confirming bank adds its undertaking to the issuing bank's; the beneficiary then bears the confirming bank's risk instead of the issuing bank's country risk.

UCP 600 discrepancy handling: the issuing bank may refuse documents within five banking days; a refusal notice must state all discrepancies and the disposition of documents.

Standby L/C: governed by ISP98 or UCP 600 if stated; functions as a guarantee rather than a payment instrument.

Export bill negotiation: the bank purchases the exporter's draft with recourse; if the importer defaults, the exporter must repay the negotiated amount plus interest.

Import settlement methods: sight L/C, usance L/C, and import D/A; the importer's bank guarantees payment and the importer settles at maturity.

Foreign exchange proceeds requirement: export proceeds must be repatriated and can be retained in a foreign currency account; the retention rules are set by the FX regulations.

Trade credit: supplier credit (deferred payment) and buyer credit (bank loan to the importer) shift financing risk; the exporter's bank may require a guarantee.

Shipping documents: commercial invoice, packing list, B/L, and insurance policy; the L/C determines which documents are required, and missing documents are discrepancies.

Forward points: annualized forward premium = (forward − spot) ÷ spot × (360 ÷ days) × 100; compare with the interest differential to test covered interest parity.

FX swap pricing: swap points ≈ spot × (i_quote − i_base) × days ÷ 360; a positive value means the base currency trades at a forward premium.

Option pricing inputs: spot, strike, volatility, time to expiry, and the interest rate differential; higher volatility raises both call and put premiums.

Delta hedging: delta measures the change in option value per unit change in the spot rate; a delta-neutral position requires offsetting spot or forward trades.

NDF settlement: cash settlement in USD (or another convertible currency) against the fixing; the Korean won NDF market is offshore and settles against the Seoul fixing.

Value at risk methods: variance-covariance (parametric), historical simulation, and Monte Carlo; each requires a confidence level and holding period.

Stress testing: apply extreme but plausible exchange rate shocks to the open position; complements VaR, which underestimates tail risk.

Open position limits: banks set dealer and desk limits; the BOK's FX position rules cap the ratio of foreign currency assets to capital.

Remittance channels: bank wire (SWIFT), card networks, and specialized money transfer operators; bank wire uses SWIFT MT103 for customer transfers.

SWIFT MT103 fields: ordering customer, beneficiary, amount, value date, and charges (OUR, BEN, SHA); SHA splits charges between sender and beneficiary.

Annual remittance limit: USD 50,000 per resident per year for current transactions; the limit is tracked across banks through the FX information system.

Overseas study remittance: tuition and living expenses may exceed the basic limit with admission and tuition documents; the bank verifies the institution.

Foreign currency exchange for individuals: buying and selling foreign currency at a bank requires identity verification; exchange of KRW to foreign currency above a threshold is reported.

Traveler's checks and prepaid FX cards: prepaid cards are reloadable within the annual limit; unused balances can be refunded in KRW at the card issuer's rate.

Inheritance and gift remittances: require proof of relationship and the source of funds; large gifts may trigger gift tax reporting obligations.

Reporting suspicious transactions: banks file suspicious transaction reports (STRs) with the Korea Financial Intelligence Unit; tipping off the customer is prohibited.

Nominal vs real exchange rate: nominal is the quoted rate; real adjusts for relative prices and is the relevant measure for competitiveness.

Interest rate parity: covered parity links forward premium to the interest differential; uncovered parity predicts spot change equals the differential, but empirically fails in the short run.

Order flow and intervention: the BOK may intervene to smooth disorderly moves; intervention affects reserves and the monetary base.

Exchange rate regimes: Korea operates a floating regime with smoothing operations; the KRW is not pegged.

Market hours and liquidity: onshore KRW/USD liquidity peaks in the morning and around the London open; offshore NDF trading continues after onshore close.

Bid-ask spread determinants: currency volatility, transaction size, counterparty credit, and market liquidity; spreads widen in stress.

Triangular arbitrage: if EUR/KRW × USD/EUR ≠ USD/KRW, arbitrage restores consistency; transaction costs define the no-arbitrage band.

Currency correlation: KRW tends to move with other Asian currencies and with risk appetite; a risk-off shock typically weakens KRW.

The FETA applies to foreign exchange transactions between residents and non-residents and to certain resident-to-resident transactions involving foreign currency.

Current transactions are free in principle; capital transactions require reporting or approval, reflecting the FETA's capital account liberalization with safeguards.

Emergency measures: the MEF may require the deposit of foreign currency proceeds, restrict payments, or suspend FX transactions during a crisis.

FX bank obligations: verify identity, purpose, and source of funds; report large transactions; maintain records; and comply with BOK guidelines.

Penalties: unauthorized capital transactions can be punished by imprisonment or fines; administrative sanctions include business suspension and correction orders.

Reporting thresholds: large cash transactions and suspicious transactions are reported to the FIU; the FX bank is the first line of detection.

Cross-border data and reporting: FX transactions are recorded in the FX information system; banks must report accurately and timely.

Regulatory changes: the FETA and regulations are amended periodically; candidates should check the effective date of the rules in force.

FX deposit products: demand deposits, time deposits, and non-resident won accounts; each has a distinct interest and convertibility structure.

Interest calculation: simple interest for time deposits, typically paid at maturity; early withdrawal reduces the rate to the demand rate.

Currency conversion inside the bank: the bank applies its posted cross rate; the spread is a cost to the customer.

Deposit protection limit: the KRW-equivalent of the protected amount applies; foreign currency deposits are converted at the rate on the date of the protection event.

Reserve requirements: the BOK may adjust FX reserve ratios to manage liquidity; the ratio applies to the increase in deposits.

Non-resident won accounts: convertible within eligible won funds; conversion is reported to the BOK.

Anti-money-laundering: cash deposits above threshold and unusual patterns are reported; the bank may freeze the account pending investigation.

Dormant accounts: balances are transferred after a defined inactivity period; the customer can reclaim with identity verification.

L/C independence principle: the credit is separate from the sales contract; the bank pays against complying documents even if the goods are defective.

Strict compliance: documents must match the credit terms exactly; even a minor discrepancy allows the issuing bank to refuse.

UCP 600 examination period: five banking days after presentation; refusal must be by telecommunication and state all discrepancies.

Documentary collection: D/P and D/A; the bank acts as agent and does not guarantee payment; the exporter bears the buyer's risk.

Bill of lading types: on-board, received-for-shipment, clean, foul, straight, and order; an order B/L is negotiable by endorsement.

Trade finance risk: country risk, buyer credit risk, document risk, and FX risk; the exporter's bank prices these into the negotiation rate.

Export proceeds repatriation: the exporter must repatriate proceeds within the period set for the settlement method; retention in a foreign currency account is permitted.

Incoterms risk transfer: FOB, CFR, and CIF transfer risk at shipment; DAP and DDP transfer risk at destination, with DDP including import duties.

Spot vs forward: spot settles T+2; forward settles on a date beyond spot, with the rate fixed at trade date.

FX swap: two legs, spot and forward, in opposite directions; used to manage liquidity and to roll positions.

Currency option strategies: straddle (call + put at same strike), strangle (different strikes), and collar (buy put, sell call) to reduce premium cost.

NDF: cash-settled forward used for restricted currencies; the fixing source is specified in the contract.

VaR limitations: assumes normal distributions and stable correlations; underestimates tail risk and liquidity risk.

Stress testing: apply historical and hypothetical shocks; complements VaR and is required by regulators.

Hedging policy: identify exposure, choose the instrument, set the hedge ratio, and monitor the hedge's effectiveness.

Position limits: dealer limits, desk limits, and bank-wide limits; the BOK monitors banks' FX positions.

SWIFT MT103: customer transfer; MT202: bank-to-bank transfer; the charge code (OUR, BEN, SHA) determines who pays fees.

Remittance limit: USD 50,000 per resident per year for current transactions; the limit is tracked through the FX information system.

Overseas study: tuition and living expenses may exceed the limit with documents; the bank verifies the institution and the purpose.

Foreign currency cash: residents may carry up to USD 10,000 without declaration; amounts above must be declared to customs.

Prepaid FX cards: reloadable within the annual limit; refunds are converted at the issuer's rate.

Gift and inheritance remittances: require proof of relationship and source of funds; large gifts may trigger gift tax reporting.

Suspicious transaction reporting: banks file STRs with the FIU; tipping off the customer is prohibited.

Exchange rate application: buying foreign currency uses the bank's selling rate; cash rates carry a wider spread than telegraphic transfer rates.

Quotation convention: KRW per unit of foreign currency is the domestic convention; USD/KRW 1,350 means 1 USD = 1,350 KRW.

Cross rate: EUR/USD = (KRW per EUR) ÷ (KRW per USD); always divide by the rate whose base is the priced currency's quote currency.

Appreciation: a lower USD/KRW means KRW appreciation; the percentage change is computed on the starting rate.

Forward parity: F/S = (1 + i_KRW) ÷ (1 + i_USD); a positive forward premium reflects a higher KRW interest rate.

Covered interest arbitrage: borrow low, invest high, sell forward; profit exists when the forward premium differs from the rate differential.

Balance of payments: a current account surplus supports KRW; capital outflow weakens KRW; the FX rate reflects the combined balance.

Market structure: onshore interbank trading is broker-mediated; the Seoul FX market operates 09:00–15:30 local time.

REER: nominal effective rate adjusted by relative prices; a rising REER signals lost competitiveness.

FETA is the basic statute; the Enforcement Decree, the Foreign Exchange Transactions Regulations (MEF), and the Guidelines (BOK) supply detail.

Residents vs non-residents: FETA obligations attach mainly to residents; transactions with non-residents are generally freer.

Current transactions are free in principle; capital transactions require prior report or approval.

Overseas direct investment: report to a designated FX bank within the automatic approval limit; above the limit requires approval.

Foreign borrowing: report to the bank; use of proceeds is restricted (no domestic real estate, no domestic-currency lending).

Sanctions: correction orders, business suspension, and criminal penalties for violations; administrative fines for reporting failures.

Real-name and purpose verification: FX banks verify identity and purpose; structuring to avoid thresholds is prohibited.

Reporting: FX banks report large or unusual transactions; residents report capital transactions through the designated bank.

Account types: demand, savings, time deposit, and non-resident won account; each has distinct convertibility rules.

Deposit protection: KRW-equivalent value up to the per-depositor limit; principal and accrued interest are protected.

Reserve requirement: the BOK sets a marginal reserve ratio on FX deposits, differentiated by maturity.

Interest: FX deposit rates track the currency benchmark (SOFR for USD) plus a bank spread; KRW conversion adds FX risk.

Cash deposits: banks verify the source and may reject suspicious cash; counterfeits are confiscated.

Non-resident won accounts: convertible within eligible won funds; conversion is reported.

Dormant accounts: transferred after a defined inactivity period; reclaimable with identity verification.

FX liquidity: banks hold foreign currency liquidity to cover short-term liabilities; the BOK monitors the FX liquidity coverage ratio.

Payment methods by exporter risk: advance payment, L/C, documentary collection, open account.

L/C: the issuing bank's irrevocable undertaking; documents must comply strictly with UCP 600.

UCP 600: 21 calendar days for presentation after shipment unless stated; five banking days for examination; the credit is independent of the contract.

Documentary collection: D/P releases documents against payment; D/A releases against acceptance; the exporter bears the buyer's credit risk.

Bill of lading: an ocean B/L is a document of title; an air waybill is not negotiable; a clean on-board B/L evidences shipment.

Trade finance: export bill negotiation with recourse, export bill discount, import usance L/C, and bank guarantees.

Proceeds repatriation: exporters must repatriate proceeds within the period set for the settlement method.

Incoterms 2020: FOB risk passes on board; CIF adds cost and insurance to the destination port, but risk passes at shipment.

Spot settlement: T+2 for most pairs; USD/CAD is T+1; KRW/USD onshore spot settles T+2.

Forward: a fixed-rate exchange on a future date; used to hedge receivables and payables; non-deliverable if the currency is restricted.

FX swap: simultaneous spot and forward in opposite directions; swap points = forward − spot, driven by the interest differential.

Currency option: the buyer pays a premium for the right to buy (call) or sell (put); break-even = strike ± premium.

NDF: cash-settled against a fixing rate; settlement = notional × (fixing − contract rate) ÷ fixing.

VaR: estimated maximum loss over a horizon at a confidence level; a 1-day 95% VaR of 100 million KRW means losses exceed that on about 5% of days.

Hedging: a forward locks the rate and forfeits upside; an option preserves upside at a premium cost.

Position limits: dealer, desk, and bank-wide limits; the BOK monitors banks' FX positions.

Remittance limit: USD 50,000 per resident per year for current transactions; tracked across banks.

Overseas study: tuition and living expenses may exceed the limit with documents; the bank verifies the institution.

Overseas real estate: requires reporting to an FX bank and is subject to source-of-funds restrictions.

Foreign currency cash: up to USD 10,000 may be carried without declaration; amounts above must be declared to customs.

Gift and inheritance remittances: require proof of relationship and source of funds; large gifts may trigger gift tax reporting.

Payment cards abroad: card spending is an FX transaction settled at the issuer's rate; the card limit is separate from the remittance limit.

Exchange rate application: buying foreign currency uses the bank's selling rate; cash rates carry a wider spread than telegraphic transfer rates.

AML: remittances above thresholds and suspicious patterns are reported to the FIU; splitting remittances to avoid limits is prohibited.