THE NAMES sound as if they were toys or children’s stories—KIKO in Korea, TARN in Brazil and other countries. But they are part of a business model based on the use—or misuse—of exotic derivatives whose results are anything but imaginary. Transactions in these derivatives have resulted in massive losses that fueled currency market panics and helped transmit the fi nancial crisis to emerging markets. The very real consequences led the head of Poland’s business roundtable to call them a “product from hell.”

The first reported losses were at private firms in the tradable goods sector. Most of the firms were exporters that appeared to be using the derivatives to hedge against ill effects if their domestic currency were to appreciate. But when the currencies depreciated instead and the losses were disclosed, foreign exchange markets reeled as the firms had to scramble and sell local currency for dollars to cover their losses. The direct losses have been deep and wide. An estimated 50,000 firms in the emerging market world have been affected. This includes 10 percent of Indonesia’s exporters and 571 of Korea’s small and medium-size exporters. Losses in Brazil are estimated at $28 billion, in Indonesia at $3 billion, and in Mexico and Poland at $5 billion each. Not all the losses are private. SriLanka’s publicly owned Ceylon Petroleum Company lost $600 million, and China’s Citic Pacific suffered $2.4 billion in losses

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