Foreign Exchange Markets and Currency Risk Management
Domain 2 covers the mechanics of the won market and the discipline of measuring and hedging currency exposure. The exam tests quoting conventions, the onshore/offshore linkage through the NDF, hedge instrument selection, and the accounting and economic consequences of a hedge.
Quotes, venues and fixings
- Onshore USD/KRW trades in the Seoul interbank market. Since July 2024 the session runs 09:00 to 02:00 the next day, and registered foreign institutions (RFIs) may quote directly, narrowing the gap with the offshore NDF.
- The 매매기준율 (base rate) published by the Seoul Money Brokerage Services is the reference for NDF cash settlement, customs valuation and accounting translations.
- NDFs are cash-settled against the fixing and never deliver won; they are the standard hedge for offshore custodians and for Korean corporates with non-deliverable counterparties.
Exposure and hedge design
- Transaction exposure (contracted cash flows), translation exposure (consolidating foreign subsidiaries), economic exposure (future competitiveness).
- Hedge ratios depend on cash-flow certainty and on hedge-accounting eligibility under K-IFRS 1109; undocumented hedges produce P&L volatility even when the economics are sound.
Worked example
An exporter books USD 10m receivable in 90 days and sells forward at 1,340, locking KRW 13.40bn. At maturity spot is 1,300: the forward beats spot by KRW 400m. If spot is 1,380, the forward costs KRW 400m relative to spot. The hedge removed variance, not regret - performance is judged against the budget rate, not the realised spot.
Traps that cost marks
Assuming NDFs involve delivery; treating the forward rate as a forecast of spot; ignoring fixing risk when the settlement source differs from the hedging venue; hedging a notional that does not match the cash-flow month, creating over-hedging that is itself a speculative position.