NPS's 'Currency Defense' Sparked Criticism, But Currency Hedging Brought 100 Billion Won Valuation Gain Last Year

"Book Gain" Driven by Closing Rate Management
1.1 Trillion Won Valuation Loss in 2024 Due to Year-End Closing Rate

The National Pension Service (NPS) recorded an evaluation gain in the 100 billion won range from its currency hedging operations last year.

According to NPS on April 1, its evaluation gain from currency forward transactions (including currency forwards and foreign currency non-deliverable swaps) amounted to 103.6 billion won last year. In 2024, it had posted an evaluation loss of 1.1361 trillion won, but within a year, its evaluation profit and loss turned positive. Although the timing, scale, and trigger conditions of the NPS's currency hedging are all undisclosed, the related evaluation profit and loss figures are released each year through public disclosures.

When the value of the won plummeted last year, the NPS, in cooperation with foreign exchange authorities, began hedging by selling a portion of its overseas assets through currency forwards. This led to criticism that the pension fund was being used as a "shield" against exchange rate volatility. Currency forward transactions involve trading foreign currency at a pre-agreed rate at a future date. Selling currency forwards increases the supply of dollars in the market, which helps lower the exchange rate.

This recent "book profit" was due to authorities managing the closing exchange rate at the end of the year, causing the closing rate to fall on the last trading day. The won-dollar exchange rate, which had topped 1,480 won at the end of last year, dropped to 1,439.5 won on the final trading day, thanks to aggressive market intervention by the authorities. A source in the investment banking (IB) industry analyzed, "It appears that the pension fund established a large-scale currency forward sell position at the upper end of 1,440 won, above the closing price (1,439.5 won)." In a currency forward sell position, a foreign exchange gain is realized if the spot rate at maturity is lower than the contracted rate, and a loss is realized if it is higher. For contracts that have not been settled, the evaluation gain is calculated based on the exchange rate at a specific point in time.

The opposite occurred in 2024, during the period of martial law. At that time, due to the unexpected imposition of martial law, authorities were unable to manage the closing exchange rate, which surged to its highest year-end level in 27 years (1,472.5 won). The NPS recorded a massive evaluation loss of over 1 trillion won at that time.

However, these are only "unrealized gains and losses" as book figures. An official from the Ministry of Health and Welfare, which oversees the pension fund, explained, "It is true that the evaluation gain from currency hedging was positive at the end of last year, but this figure is based on contracts that have not yet expired. If the exchange rate is expected to rise at contract maturity and result in a foreign exchange loss, we plan to defend returns by employing strategies such as extending the maturity (rollover) of the contracts."

This content was produced with the assistance of AI translation services.