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However, the ESGC is permitted to hold Korean won denominated assets as well as foreign currency denominated assets.
The exact corporate form of the ESGC would depend on governance and accountability imperatives, but its charter and mission would be to promote the public good through enhancing financial stability.
The primary purpose of the ESGC is to play the role of the counterparty to exporting firms or other private sector economic entities who wish to hedge currency risk.
The ESGC would buy dollars forward when an exporter wished to sell dollars forward.
Crucially, the ESGC can hedge its own currency exposure by holding Korean won assets (such as Korean government bonds or Bank of Korea bonds) but be valued in US dollars.
The basic idea can be illustrated in terms of the schematic in figure 15, which illustrates the balance sheet of the ESGC at its inception and then after a series of transactions.
However, the ESGC would then begin a series of transactions and modify its portfolio of assets.
Through this adjustment of its asset portfolio, the ESGC creates a short position in the US dollar which exactly offsets the long dollar exposure created by the forward position.
Although the currency risk is perfectly hedged through these transactions, the ESGC bears some counterparty risk from the possibility that the exporting company is unable to deliver dollars at the maturity date of the forward contract.
By combining credit guarantees with its own operations, the ESGC will be able to provide trade financing as well as hedging services, as we will detail below.
We now provide a more detailed description of the workings of the ESGC through a series of examples.
Example 1: ESGC as counterparty to US dollar forward contract sold by exporter
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