This study seeks to identify (the current conditions and dangers of trading financial derivatives in the international financial market), and examine the background of its domestic application and applicable products. Ultimately, the study seeks to discuss potential problems regarding the financial products’ entry in Korea and suggest feasible countermeasures for the government and industries.
The recent trends of the international financial market–globalization, liberalization and securitization–are playing a great influence on the Korean financial market as it used to be relatively distant from the international market. In particular, the agreement of the Uruguay Round at the end of 1993 was a gigantic event that brought the agricultural, financial and service industries into the realms of free trade asides from trade liberalization focused on secondary industries. The Uruguay Round, which will come into effect in 1995, is expected to bring a vast wave of change in the local banking industry and economy.
Most of the contents found in the round’s schedule of concessions have already been stated in the Third Blueprint for Financial Liberalization and Market Opening as suggested by the Korean government. Yet, the article regarding the ‘permission of the entry of new financial products as based on relevant laws and articles’ has been modified to become more comprehensive in the negotiation process.
The important point here is that the new financial product as mentioned in the article refers to financial derivatives, in which local financial organizations are still generally unprepared to deal.. This means giving room to foreign financial entities to permeate into the domestic market as their transaction sizes increase and the types of derivative products diversify throughout time.
In particular, as liberalization is taking place in various aspects (including interest rates and capital transactions) along with the revision of the Foreign Exchange Control Law and the launch of the World Trade Organization at the same time, the variability of financial prices are expected to surge, which is also seen to lead to an increase in the demand for derivatives. Traditional transactions of derivatives meant a transaction in the international financial market through foreign exchange, but the newly introduced derivatives are purely based on the Korean Won for the first time.
Thus, as Korean banking institutions will also be participating in the wholesale money market or as the final buyer, they will have to build a new understanding of the derivatives market (including both listed and off-board transactions) and be capable of using this new business opportunity. The government on the other hand, will have to conduct a thorough analysis on laws and regulations relevant to the market of the newly introduced products as more development is expected. By organizing and revising necessary components, the government will have to efficiently construct the infrastructure of the newly rising market.