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보고서
2010 Nov/15
A Study on the Imbalance in the Demand for Forward Exchange in Korea and its Policy Implications Research Papers 10-04 PDF
Lee, Seunghoon
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Kim, Hyong Uk
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Yoon, Jong mun
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Summary
The selling demand for selling forward exchange of exporters and international investors has exceeded the buying demand for forward exchange of importers in Korea. This demand imbalance for forward exchange has been a cause of instability in the foreign exchange market since banks that supply forward exchange contracts for its demanders usually borrow short-term abroad to cover their position. There are two main sources for this imbalance: a demand imbalance between exporters and importers, and a relative high demand for currency hedging from international funds investing in foreign securities. Excessive selling demand increases banks’ short-term foreign debt and expands the opportunities of arbitrage trading. Domestic banks’ foreign debt and swap contracts disturb the foreign exchange market and the bond market. A study is needed to resolve these problems on the demand imbalance for forward exchange. There are several approaches to achieve the goal by: (1) reducing the large-scale exporters’ forward exchange selling; (2) increasing large-scale importers’ forward exchange buying; (3) tackling problems in foreign exchange risk insurance through KSURE; and (4) reducing the portion of currency hedging by international funds. Net selling of forward exchange by shipbuilders, which are the representative exporters, accounted for the largest part (70%) of net selling due to companies. However, shipbuilders’ hedging against their order-books has been below 60% except in 2009 and thus there is no reason to intentionally reduce the net selling for managing risk. Also, our result shows that shipbuilders` forward exchange hedging does not exceed their actual hedging needs. In Korea, oil products are priced every day based on international oil prices and exchange rates. In this market structure of pricing system, oil companies can shift exchange risks to consumers and thus they have little incentive to increase forward exchange buying. We also analyzed long- and short-term price (exchange rates) asymmetry by using Granger and Lee(1989)’s error correction model. The empirical results show that there are short- and long-term oil price asymmetries. In short, domestic oil prices react quickly to the depreciation in exchange rates, but respond slowly to their appreciation. An improvement in this monopolistic market structure will increase price competition and in turn lead oil importers to have more incentive for their forward exchange hedging. Currency hedging of small- and medium-sized firms through KSURE shows that these exporters` insurance on exchange rate risk exceeds the actual need of forward exchange demand. Their over-hedged insurance policy purchases account for 30% of the total. Controlling the over-hedging will reduce foreign exchange insurance purchases, and accordingly, reduce forward exchange selling through KSURE. However, small- and medium-sized importers do not have the opportunity for foreign exchange hedging through KSURE. Thus, providing the opportunity of participation to these importers will help resolve the imbalance in the demand for forward exchange. The ratio of foreign exchange hedging in international funds in Korea has been reduced to around 60% since 2008, but it is far larger than those of other countries. If the objective of foreign exchange hedging for investment in international funds is to maximize the return of the investment compared to risk, there is no benefit from foreign exchange hedging for international funds. Therefore, the less hedging (buying) demand for foreign exchange in international funds will contribute to resolve the imbalance in the demand for foreign exchange. We estimated the contribution to resolving the demand imbalance for forward exchange due to exporting and importing companies by the hypothetical expansion in the buying demand for importers’ forward exchange and the hypothetical reduction in the selling demand for forward exchange of exporters and investors in international funds. First, oil companies’ additional 10% forward exchange buying of the dollar amount of the imported oil is expected to reduce the demand imbalance by 8.2% (5.1 billion dollars). Second, small- and medium-sized importers’ additional 10% forward exchange buying of small- and medium-sized exporters’ hedging is expected to reduce the demand imbalance by 2.3% (1.5 billion dollars). Third, assuming that over-hedging ratio of small- and medium-sized exporters is 50%, the control of this over-hedging can contribute to reducing the demand imbalance by 3.5%. Fourth, the additional 10% reduction of the current 60% of international funds` forward exchange selling is expected to contribute to resolving the demand imbalance by about 7.8% (4.8 billion dollars). In summary, more incentive of oil importers for their forward exchange hedging, more strict regulation to prevent small- and medium-sized exporters from over-hedging exchange risk through KSURE, and providing the opportunity of participation to small- and medium-size importers will help resolve the imbalance in the demand for forward exchange.