Ethical Failures and Stakeholder Impact in the KiKo Derivatives Crisis
The case study under analysis focuses on the knock-in knock-outs (KiKos) option that was in effect in South Korea before the 2008 financial crisis. Many exporters used them, which resulted in significant losses. In particular, the case involved numerous stakeholders, including exporters, banks, and government regulators. Exporters and banks experienced the most negative consequences because they lost more money. Thus, a careful analysis reveals that these harmful effects could be minimized through better knowledge and banks that meet their ethical expectations.
The South Korean exporting firms had certain expectations and fears concerning the use of KiKos. On the one hand, the organizations used these derivatives because they promised to minimize losses and increase profits associated with exchange rates. In other words, this option was used for hedging purposes (Lim, 2020). On the other hand, the option was new and incomprehensible, and the exporting firms were afraid of possible consequences. Their fears were justified because these organizations suffered significant economic losses.
Banks’ responsibility deserves attention because they offered and promoted this new instrument. According to the Federal Deposit Insurance Corporation (n.d.), these organizations must manage and protect their customers’ property and money. This phenomenon is a fiduciary duty that provides banks with legal and ethical obligations to protect their customers’ resources. The financial organizations failed to satisfy this requirement to clarify that customers perfectly understood the conditions of the new option. It was a primary reason for the enormous economic losses that affected South Korea.
Regulatory Oversight and Governmental Responsibility
The government was the leading regulatory body in the country and should have taken specific steps to address the issue. Scientific evidence demonstrates that the state is expected to intervene when it is necessary to overcome a crisis. For example, a study by Ashraf (2020) indicates that governmental policies positively affected economies during the COVID-19 pandemic. That is why the government of South Korea should have taken specific actions.
Firstly, the government was expected to govern the derivatives market more closely to control and prevent the massive sale of KiKos. An accompanying step was to educate investors to help them make more reasonable decisions. Secondly, the government could conduct investigations to identify guilty parties and provide victims with essential financial support. It was a significant ethical expectation of the state to provide businesses and individuals with the required assistance.
It is possible to highlight some connections between the case under analysis and the trade balance. This phenomenon is significant because it is one of many metrics used to understand the health of the economy (Dogru, Isik, & Sirakaya-Turk, 2019). An international crisis significantly affected the difference between the state’s imports and exports (Blavasciunaite, Garsviene, & Matuzeviciute, 2020).
In South Korea, the balance of trade witnessed adverse effects. Financial losses harmed the exporters, and the latter reduced production rates and fired employees. Many bankruptcy cases resulted in the necessity to sell assets to foreign investors. Thus, the volume of imported goods rose, which worsened the trade balance and the state’s financial health.
Lessons Learned
If I were a consultant, I would draw a few lessons from the case, and there would be evidence-supported recommendations to solve the problem. Firstly, I would highlight the importance of knowledge and expertise. Firms can only purchase derivatives if they understand how they work perfectly.
Secondly, organizations and investors should only cooperate with banks that meet their ethical considerations. This issue guarantees that such financial institutions will provide their customers with assistance in coping with new instruments. I would use the example of South Korean exporters to communicate the importance of these lessons to my clients.
References
Ashraf, B. N. (2020). Economic impact of government interventions during the COVID-19 pandemic: International evidence from financial markets. Journal of Behavioral and Experimental Finance, 27, 100371.
Blavasciunaite, D., Garsviene, L., & Matuzeviciute, K. (2020). Trade balance effects on economic growth: Evidence from European Union Countries. Economies, 8(3), 54.
Dogru, T., Isik, C., & Sirakaya-Turk, E. (2019). The balance of trade and exchange rates: Theory and contemporary evidence from tourism. Tourism Management, 74, 12-23.
Federal Deposit Insurance Corporation. (n.d.). Trust/fiduciary activities. Web.
Lim, J. (2020). Citibank Korea to pay compensation to some investors in decade-old dispute. S&P Global. Web.