Weak won revives concerns over another KIKO crisis

During the 2008 global financial crisis, the foreign exchange market froze and dollars became scarce, causing the won-dollar exchange rate to surge almost daily. The shock hit households and businesses alike. I still vividly remember the looks of despair on the faces of small and midsize companies hurt by so-called KIKO products, which I witnessed firsthand while reporting on the banking sector as an economics journalist.

KIKO, short for Knock In, Knock Out, was a derivatives product widely adopted by export-oriented companies before the global financial crisis. When the exchange rate moved within a predetermined range, companies gained the right to sell dollars at a contracted rate, helping to limit currency risk. But once the exchange rate climbed above a set upper threshold, companies were forced to sell dollars to banks at a much lower agreed rate, regardless of the prevailing market price. As a result, more than 700 companies incurred losses exceeding 3 trillion won due to KIKO products.

In December 2025, that nightmare is creeping back. The won-dollar exchange rate is approaching 1,480 won, edging toward the psychologically significant 1,500 level. It was once widely believed that a weaker won would benefit exporters by boosting global price competitiveness. Today, however, that assumption no longer holds. Companies are not simply exporting domestic products but rather finished goods assembled through a global supply chain. In a system where a substantial portion of raw materials, intermediate goods, and components are imported in dollars, a rising exchange rate translates almost immediately into higher costs.

Alarm bells are ringing across the manufacturing sector. The Korea Institute for Industrial Economics and Trade estimates that a 10 percent increase in the exchange rate reduces the average operating profit margin of major South Korean companies by 0.29 percentage points.

If even large corporations are feeling the strain, the burden on small and midsize enterprises, which have weaker fundamentals and limited bargaining power, is even heavier. Concerns are mounting over the possibility of a second KIKO-style crisis. Since the original fallout, the structure of currency hedging products has clearly improved. New offerings now cap potential losses or ease terms that were previously unfavorable to companies.

Even so, the current surge in the exchange rate exceeds the forecasts of many firms. Unlike large conglomerates, few small and midsize exporters with limited capacity to manage currency risk would have designed strategies assuming the rate would climb to 1,500 won. While the scale may not match the original KIKO crisis, it is not impossible that a significant number of companies remain entangled in KIKO-like products.

As the high exchange rate persists, the presidential office and the government have stepped up efforts to defend the currency, convening meetings with major corporations and large securities firms in rapid succession. Emergency measures are clearly needed. Yet there are obvious limits to trying to suppress the exchange rate by mobilizing companies and securities firms. It is neither feasible nor appropriate to pressure firms with overseas investment plans to release dollars into the market, and it is impossible to stop retail investors from seeking higher returns abroad.

The exchange rate reflects market supply and demand. The current high rate is not simply a temporary fluctuation; it signals that confidence in, and the appeal of, the South Korean market and the won have weakened structurally. If slowing growth, policy uncertainty and geopolitical risks are all contributing factors, these issues must be carefully diagnosed. Without a medium- to long-term strategy to restore trust in the won, a high exchange rate will become the norm, and corporate memories of KIKO may reappear under a different guise. What is needed now is not hasty pressure, but a sober assessment and measured response.