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Korean Journal of Financial Studies 2011;40(1):85-107.
Published online February 28, 2011.
Improving the Regulatory Scheme for OTC Retail Foreign Exchange Transactions
Cheol Ho Park
장외소매외환거래 제도개선에 관한 연구
박철호
Abstract
The regulatory scheme for OTC retail foreign exchange (FX) transactions in Korea neither allows financial investment companies to act as a counterparty to customers, nor does it permit investors to trade Korean won (KRW)-denominated currency pairs. These restrictions narrow the business scope for financial companies, increase investors` transaction costs, and reduce both speculative and hedging activities in the retail FX market. To tackle these side effects, this article proposes that retail FX trades need to be classified as OTC derivatives, not exchange-traded derivatives, under the Financial Investment Services and Capital Market Act. Moreover, there should be an exception to the OTC derivatives market regulation in the Act so that retail investors can trade certain OTC derivatives with net cash settlement for both hedging and speculation purposes. Non-professional investors in Korea have reportedly suffered huge losses from highly-leveraged trading of cross currency pairs. The empirical results in this article show that Korean won (KRW) carry trades yielded economically significant returns during the period 2006~2010. It suggests that KRW-denominated trades with low leverages may provide retail investors with a better performance than foreign-currency-denominated trades in the medium to long-term.
Key Words: 소매외환거래,안정적 부트스트랩,외환파생상품,캐리트레이드,Carry Trades,FX Derivatives,FX Margin,FX마진,Retail Foreign Exchange Transactions,Stationary Bootstrap
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