[VIEWPOINT]Keep Government's Hand Out of Market

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[VIEWPOINT]Keep Government's Hand Out of Market

There were reports this week that people with links to the terrorist attacks in the United States may have used their advance knowledge and profited when the airline companies' stock price plunged. At the center of the reports are put options, which yield large profits in proportion to the drop in the value of the underlying instrument. Bloomberg reported that trading volume in put options in American Airlines and United Airlines stocks during the days before the attacks surged past the normal volume, suggesting the link.

If the allegations are proven true, it would mean that the terrorists not only succeeded in doing serious damage to the heart of American capitalism but also profited generously from their actions.

Options contracts deal in the right to buy and sell the underlying securities at a set price at a definite time. There are call options and put options. If you are betting on a rise in the price of a stock, you long, or buy, call options, which are rights to buy the underlying stock at the contracted price.

For example, if you hold a call option contract to buy 100 shares at 50,000 won per share and if the price has gone up to 60,000 won on the exercise date, you realize a 1 million won profit (less any costs involved) by exercising the option at 50,000 won and immediately selling the stock at 60,000. Put options carry the right to sell the underlying security, but in this case the holder profits if the underlying security declines in value by the exercise date.

The reports this week alleged that even terrorists may have played a hand in the complex derivatives market. Trading in index options, which are based on stock market indices, began in Korea in 1997. But investors here do not have the option of investing in options contracts in individual stocks. Let's look at why.

The Korea Stock Exchange completed development of stock options a year ago. But the Korea Futures Exchange in Pusan holds the right to trade all derivative securities through 2003. It has chosen not to trade calls and puts. The futures exchange was established in the southern city according to a campaign promise in the last presidential election.

While our government is tangled in the politics of the issue, Hong Kong Exchanges and Clearing Ltd. said on Aug. 30 it will introduce five Korean companies' stock options on Oct. 4. The five Korean stocks will be Samsung Electronics, SK Telecom, Kookmin Bank, Korea Telecom and Korea Electric Power Corp. The five stocks to be traded in Hong Kong make up nearly half of the market capitalization of the Korea Stock Exchange. Caught completely off guard, the government hastily announced Tuesday that Korea Stock Exchange will begin trading in stock options in January - three months behind Hong Kong.

After the World Trade Center buildings fell to the ground last week, the New York Stock Exchange reopened Monday after being closed four days. The 7 percent loss in value on the first day was a gutsy performance considering the concern over the market. The American performance was credited to the Federal Reserve's decisive half-a-percentage-point cut in the key interest rate and corporations' decisions to buy back their shares, which absorbed a significant portion of the sell orders.

The European Central Bank matched the Federal Reserve's move three hours later with its own rate cut. The central banks of Canada, Switzerland and Sweden followed in concert. In Seoul, the key interest rates were slashed one day later on Wednesday.

The Tokyo market opened half an hour late on the day of attack with the daily limit on fluctuations reduced by half, which limited the drop to 6.6 percent. Our stock market, which also opened for afternoon trading on Wednesday with no safeguards to stop a free fall, posted the largest percentage drop of any market in the world following the attacks.

The market will not be controlled by orders or promises or campaigns. With investors and capital moving across borders and international markets moving in tandem, campaigns like "no stock selling" is not an effective means. A rational financial system must be in place that corporations and investors can trust. Leave it to the market to mold mature economic entities.


The writer is economic news editor of the JoongAng Ilbo.

by Yang Jai-chan

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