(LEAD) Court says KIKO currency option not unfair

(ATTN: ADDS reaction at the bottom; CORRECTS bank name)
By Kim Eun-jung
SEOUL, Feb. 8 (Yonhap) - A Seoul court on Monday ruled in favor of banks in a
court battle over a controversial currency option derivative, going against a
local firm that sought to nullify its contract and demanded return of funds for
what it called an "unfair" agreement heavily biased toward the banks.

The so-called Knock-in, Knock-out (KIKO) currency derivatives were sold by about
a dozen banks to a range of small and medium local exporters that used the
products to hedge against volatile currency swings. But following the onset of
the global credit crunch in 2008, the Korean currency tumbled 25.7 percent to the
U.S. dollar in that year alone, leading to heavy losses for KIKO buyers.
South Korean firm Soosan Heavy Industries Co. filed a suit against Citibank Korea
and Woori Bank, which sold the contract in November 2008, seeking to nullify what
it called an unfair agreement and demanding reparation from the banks. The firm
held the banks responsible for having failed to notify the company of the
potential risks.
"It is hard to say that the product is not adequate for hedging currency risk
simply because (Soosan) got results they had not anticipated at the time they
made the contract," Presiding Judge Lim Sung-geun at the Seoul Central District
Court said.
"KIKO is a product designed to partially hedge risk and the banks' profits (from
KIKO) were not excessive compared to the interest earned on other financial
transactions," the judge said, noting the loss claimed by the plaintiff assumed
"the worst scenario."
The banks argued that the KIKO products were not intended to result in
unreasonable losses for buyers as a flurry of firms have argued in court. The
banks said the responsibility for the misfortune rests with those companies,
which entirely ruled out the possibility that the won's potential plunge could
result in heavy liabilities.
With other similar cases pending in court, industry watchers expect the ruling on
the controversial contract could affect the remaining cases. In 2008, over 100
small-sized companies filed petitions against banks that sold them similar
options after suffering heavy losses.
Citibank Korea and Woori Bank welcomed the court ruling, with Citibank saying it
"respects the court's decision." Soosan Heavy Industries could not be reached for
comment.
ejkim@yna.co.kr
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