Abstract
At 2008 CITIC Pacific incurred a huge loss of 51.5 million US dollars from its foreign currency derivatives contracts. The reason for such a huge loss is the misuse of a complex derivative called Knock Out Discount Accumulator (KODA). This article focuses on the mechanisms of such derivatives as well as how such mechanisms make CITIC Pacific take a huge loss. In this article, we find that the cumulative option contract has been widely recognized as one of the most effective hedging strategies against foreign exchange risk. However, the cumulative option entered by CITIC Pacific is unreasonable. We propose some suggestions for the firm to follow in order to help hedge the risk. Besides, what international trade companies can learn from this case is also talked about.
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