Why SK Hynix(Memory SEMI) collapsed at the historical Top?

noreply@slice-app.io (BreadLEE FRM) — Fri, 09 Oct 2026 08:55:37 GMT

I have spent quite some time thinking about how to explain these ideas so that people can understand them and apply them in practice. It is harder than it sounds. Still, I wanted to take the questions readers are most likely to ask and bring them together in a single narrative that makes the subject easier to follow. Before getting into the substance, there is one question I should address first. It is probably the question many readers most want answered: “Can derivatives help us read the market?” Let me put the peripheral arguments aside and give you my answer: “Under certain market conditions, they can be very useful.” Those conditions depend on several factors, but one prerequisite stands out above the rest. What is it? An environment of abundant liquidity. The total notional value of the derivatives market has, in fact, increased sharply since the era of quantitative easing, or QE, began. Why has that happened? The simplest explanation is that derivatives trading is a zero-sum game. One participant’s gain is another participant’s loss. So how do you win that game? One way is to overwhelm the other side with capital. Participants with easy access to funding can deploy enough money to move prices. With a seemingly inexhaustible supply of capital, they can force those on the other side into losses. You may already have someone in mind. But what does the environment ahead of us look like? As I have repeatedly pointed out, capital is becoming scarce again. That is why I believe the era of derivatives may soon come to an end, at least temporarily. Even so, derivatives will likely remain useful as tools for anticipating and interpreting market behavior. Let us start with futures. A futures contract is an agreement to take delivery of an asset and settle the transaction at a predetermined price on a specified future date. For our purposes, the distinction between futures and forwards is whether the contract is standardized and traded on an exchange. How, then, is a futures price determined? It is generally based on the spot price of the underlying asset and a theoretical framework known as the cost-of-carry model . The idea is straightforward. Let us work through an example. Suppose Investor A enters into a crude oil futures contract with Oil Producer B, with the contract maturing in one year. The current spot price of oil is $50. Holding all other variables constant, how should the futures price be set? B’s reasoning might look something like this: “I will not receive payment for another year, so the price should at least cover a year’s financing cost. I will also have to store the oil, which means paying for warehouse or tank space. On the other hand, C has agreed to pay me to borrow the oil temporarily and return it later, so I should deduct that income.” In a simplified formula: Futures price = Spot price + Spot price × (Interest rate + Storage cost rate − Income yield) For equities, the income component would include dividends. This is the rationale for a futures price being higher than the spot price. That is enough theory for now. How does it work in practice? Leaving aside the minority of derivatives traders who are primarily chasing an adrenaline rush, hedging—the original purpose of futures—is the main source of trading activity. Much of the futures market operates around that need. Here is another example. Investor A is considering an investment in SK hynix. Buying the ordinary shares, however, does not feel aggressive enough. Why settle for an unleveraged position when the aim is to make money faster? A therefore buys a 2x leveraged SK hynix ETF . Someone must take the other side of that trade. Typically, a liquidity provider, or LP, acts as the market maker, posting quotes and offering ETF units for sale. A securities firm will therefore often be A’s counterparty. The ETF itself is issued by an asset manager. Here, I will focus on the securities firm handling the trading side of the transaction. What exposure does the securities firm take on? In simple terms, it has taken the equivalent of a 2x inverse position in SK hynix : the opposite side of A’s exposure. To understand this better, consider how the product’s exposure is constructed. How can the LP put together a product that tracks twice the price movements of SK hynix? By combining the stock and futures in the appropriate proportions and adjusting the mix to replicate that 2x exposure as closely as possible. If you remember the school exercises about mixing 5% and 10% salt solutions, the basic idea is similar. There is, however, a crucial point. The securities firm is acting as a liquidity provider. It is not deliberately making a proprietary 2x investment in SK hynix with its own capital. It therefore needs to hedge the position so that its remaining market risk exposure is close to zero. The sequence is straightforward: Investor A buys the 2x leveraged SK hynix ETF. The LP takes the corresponding 2x inverse exposure. The LP buys the appropriate quantities of SK hynix shares and futures to hedge that exposure. But how often does an actual transaction involve only two parties? In securities markets, arrangements this simple are rare. This is also the issue I have been discussing in relation to SK hynix: in practice, several additional layers of counterparties were involved. Let us introduce the participants: A: a domestic investor in leveraged products. B: an overseas investor in leveraged products. C: a Hong Kong asset manager. D: a Hong Kong investment bank. E: a Korean securities firm. We have already looked at the domestic arrangement. Now consider the offshore version. Suppose Investor B is convinced that a major new era for memory semiconductors is approaching and buys a leveraged SK hynix ETF listed in Hong Kong. The Hong Kong asset manager, C, has entrusted the management of the relevant exposure to Hong Kong investment banks. The manager uses the cash received from investors as collateral and enters into a swap with an investment bank. The bank delivers economic exposure equivalent to approximately twice the price movements of SK hynix. In return, the asset manager pays swap charges and other service fees. These costs are embedded in the fees you pay for the ETF. But this creates a problem. The Hong Kong investment bank has also taken the inverse side of the exposure. Its solution is to hedge that risk by entering into an offsetting swap with another institution. In this case, those institutions happened to be Korean securities firms. The Korean firms were in need of dollars amid exchange-rate pressures and related funding issues. The prospect of dollar-denominated interest and fee income persuaded them to accept the arrangements. “Surely SK hynix will not go above 200,” they thought. This approach is known as back-to-back hedging . Why would the Hong Kong banks go through such an elaborate process? The reason is straightforward: SK hynix futures and options are not available on the Hong Kong exchange. Sending capital into Korea and executing the hedge directly in the domestic market would introduce additional foreign exchange risk and local market liquidity risk. The result of these swaps was that Korean securities firms ended up with exposure equivalent to an inverse position in SK hynix. As SK hynix surged, those firms—including Shinhan and NH—were making daily cash settlements to the Hong Kong investment banks amounting to tens or even hundreds of billions of won. Of course, the Korean firms had also put hedges in place, so their risk factor exposure was offset. The problem lay in the timing of the cash flows: one leg required daily cash settlement, while the hedging leg settled at maturity. The firms therefore faced a serious cash drain, even with the market risk hedged. There are a few further observations worth adding. In fact, the volume of leveraged SK hynix investment originating in Hong Kong was larger than the domestic volume. More recently, however, the gap has narrowed to the point where the difference is no longer particularly large. Interestingly, the meaningful increase in domestic ETF trading volume from late May coincided almost exactly with the point at which the won’s persistent weakening began to come to an end. The introduction of 24-hour foreign-exchange trading may have played a role. But what could connect these two developments? My interpretation is this: “The circumstantial evidence suggests that Hong Kong investment banks were facing an environment in which back-to-back hedging had become more difficult.” In other words, Korean securities firms were no longer willing to bear the burden of those arrangements. In my view, that helped avert a worst-case scenario involving a chain of securities firm failures. I have spent some time on the futures example because SK hynix has provided a particularly useful case study. That still leaves the question of how to interpret the market. Unfortunately, there is no fixed formula. As discussed earlier, you need to understand the exposures and obligations created for each counterparty by the leveraged SK hynix products before you can properly interpret the resulting futures and cash equity positions. Without that context, what can you learn from futures positions and trading turnover alone? Nothing. Unless you are prepared to become as absorbed in tracking the flow of money as I am, I would advise against trading futures. Keep their use simple: use them for hedging. For example, if you buy 10 shares of SK hynix and sell one SK hynix futures contract, the opposing positions offset your price risk, because each futures contract represents 10 shares. I will write about options next. Unlike futures, options offer several analytical approaches that you can use as reference points.

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Why SK Hynix(Memory SEMI) collapsed at the historical Top?