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October 16, 2006

Look Boss! I Lost $120 million in South Korea!

posted by MR WAVETHEORY at 10/16/2006 05:10:00 AM

Bloomberg writes that Credit Suisse Lost $120 million in South Korea. Credit Suisse lost money by selling reverse convertible notes. Apparently they are so exotic that no definition of reverse convertible exists in the English version of Wikipedia. Wiki only has the definition in German.
Credit Suisse Group (NYSE CS), Switzerland's second-biggest bank, lost about $120 million on South Korean derivatives in the third quarter, an undisclosed stumble by equity traders struggling to catch the leaders in the securities industry.

The debacle, which wasn't reported to shareholders, resulted from the Zurich-based bank's failure to protect itself against swings in the value of Korean stock options, said two people with knowledge of the matter. The loss equals about 13 percent of Credit Suisse's second-quarter revenue from equities trading.

Credit Suisse's loss resulted from the sale of reverse- convertible notes, fixed-income securities tied to stock options that are popular in Korea, said the people, who declined to be identified because the trades haven't been disclosed. The returns of such notes are linked to the performance of two or more Korean stocks. So long as both shares stay within a predetermined range, the securities pay buyers a higher yield than most fixed-income investments.

If either of the stocks rises above that range, the notes are redeemed with interest. Should one of the shares drop below the range, the bank delivers the stock to the note holder. That gives the bank a so-called put option, which changes in value with the prices of underlying stocks. The faster stock prices change, the more valuable the option becomes.

When Korean stocks leveled off in the third quarter after slumping in May and June, option values fell. Credit Suisse, which hadn't taken positions to hedge against the decline in market volatility, was then forced to write down the value of its holdings, the people said.

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