"Typically, CDS options are based on bonds as the underlying asset, but using stock indices is quite unusual."
John Porter casually responded to Executive Director Usami's remark.
"Whether it's bonds or stock indices, the purpose of insurance is the same—to hedge against potential losses."
"That may be true, but we've never structured a contract like this before. It's difficult to determine how the option should be set up."
John answered nonchalantly.
"It's quite simple. As I mentioned in the proposal, just like how CDS rates are calculated based on the probability of a country or company defaulting, we apply the same concept here. The three national stock indices serve as the underlying assets, and if they fall below the agreed threshold, the option is triggered."
Usami turned to Nakamura, who was seated to his left.
"What were the threshold levels proposed by Eldorado Fund?"
"For South Korea's KOSPI, 500. Thailand's SET Index, 600. Indonesia's IDX Composite, 450."
Leaning back in his chair with a slight smile, John added,
"Considering that the Thai SET Index is currently at 1,279, it would have to drop by more than half for the option to activate. The same goes for the other two indices."
"Hmm."
Usami stroked his chin thoughtfully as John gave a small shrug.
"Honestly, for the market to crash to that extent, it would take a catastrophe on the scale of the Kobe earthquake. In other words, the likelihood is extremely low."
Although the mention of the disaster stirred unpleasant memories, there was no denying the logic behind John's words.
"As you said, such a severe market crash is rare. That's precisely why I find this so unusual."
Usami's expression hardened, his narrowed eyes scrutinizing John intently.
"Is Eldorado Fund anticipating a major collapse in the Thai—or rather, the Asian—stock markets?"
John met his gaze directly, a faint smile playing on his lips.
"Of course not. Nomura Securities is well aware of how strong the Asian markets have been recently."
"Then why are you willing to pay such a high premium for this option contract?"
Usami's skepticism sharpened as he pressed the question.
It was only natural to be suspicious—Eldorado Fund had abruptly sent over a proposal for an unprecedented CDS option contract. There had to be another motive.
Moreover, memories of Eldorado Fund exploiting knock-in-knock-out options to extract massive sums from Japanese export companies were still fresh. Caution was warranted.
John understood the wariness behind Usami's probing and inwardly clicked his tongue.
'As expected, this won't be easy. Then again, if Nomura Securities were full of fools, they wouldn't be where they are.'
Nevertheless, he maintained a composed demeanor, his smile unwavering.
"It's exactly what it looks like—an insurance policy."
John observed Usami, who remained seated with his arms crossed.
"I don't know if you're aware, but Eldorado Fund has been investing aggressively in stock markets across Asia, not just Japan. Sometimes we make bold bets, and when we do, we need safeguards in place. This is simply a way to hedge against potential losses."
"That may be so, but the scale of this contract is far too large for a simple hedge."
Still wearing a skeptical expression, Executive Director Usami flipped through the documents in front of him.
"The proposal states that the contract amount you're seeking is $1 billion per market."
"As with any insurance, the bigger the coverage, the better," John Porter quipped nonchalantly.
But Usami responded in a firm, measured tone.
"Considering that CDS transactions typically involve a fee of around 5%, you'd be paying $150 million in annual premiums. That's an unusually large sum for simple insurance."
John's smile faded.
"Well, well."
After a brief pause, he spoke again.
"I suppose not just anyone becomes an executive at Japan's top securities firm. Fine. Since you've already figured out most of it, I'll be honest."
Usami met his gaze with an unsurprised expression, as if he had expected this all along.
"Just as you suspect, we're betting on a decline in the Asian stock markets."
The Nomura Securities executives across the table stirred in surprise.
"I knew it."
"This is..."
A wave of murmurs spread through the room. Usami furrowed his brows and asked,
"For the indices to plunge that far, as we discussed earlier, it would take a crisis on the scale of a national catastrophe. Do you really believe such an event is imminent?"
John answered smoothly.
"High risk, high return. If you want to make big money, you have to place bold bets."
Usami looked at him incredulously.
"The John Porter I know wouldn't make such an absurd wager. Is this a reckless gamble orchestrated by your headquarters in New York?"
"No comment on that."
John remained unfazed, his lips sealed on the critical details. Watching his composed demeanor, Usami shook his head.
Even though he had uncovered the underlying intent, the situation now felt even more troubling.
John then straightened his posture and asked, this time with a serious tone,
"So, will you enter into a CDS option contract with us?"
Usami tapped his fingers on the table, deep in thought. Eventually, he looked up.
"Alright. Let's discuss the specific terms."
After some negotiation, both parties finalized a $3 billion CDS option contract, using the stock indices of South Korea, Thailand, and Indonesia as the underlying assets.
Once the Eldorado Fund representatives had left, Usami remained seated in the conference room and pulled out a cigarette.
Nakamura, seated beside him, cast a sidelong glance before cautiously speaking.
"We went ahead with the contract as you suggested, but I still can't shake this uneasy feeling."
Lighting his cigarette, Usami exhaled and muttered,
"Are you worried the Asian markets really will crash?"
Even as he voiced the thought, he found it highly improbable. Nakamura shook his head.
"Not at all. Even if a market shock were to occur, it's hard to imagine the indices falling to the agreed levels."
"Then what's bothering you?"
Nakamura gazed at the empty seats where the Eldorado Fund team had been sitting just moments ago and answered,
"We're talking about the same cunning players who exploited knock-in-knock-out options to trap major Japanese exporters like Nissan and Sony. Eldorado Fund knows the odds are low, yet they still pushed for this contract. That's what's unsettling."
Usami, cigarette between his fingers, nodded in understanding.
"That's why I had our team scrutinize every potential risk that could trigger a market collapse in South Korea, Thailand, and Indonesia over the past few days. And what did we find?"
"Nothing. Absolutely nothing."
Nakamura nodded slightly, a complicated expression on his face.
"The only concerning factor we found was that all three countries recently slipped into current account deficits. But that alone might cause a mild market dip—not a full-scale collapse."
"Exactly. There's no doubt Eldorado Fund is up to something, but we just couldn't figure out what. On the other hand, the premiums from this option contract were too attractive to pass up."
Thanks to the deal, Nomura Securities would be receiving $150 million per year in CDS premiums over the next three years—a total of $450 million. And all they had to do was hedge against a highly unlikely event.
"You remember how we miscalculated our Nikkei futures position during the Kobe earthquake?"
"…Of course."
When the earthquake hit, the Tokyo stock market plunged, inflicting massive losses on Nomura, which held significant stock positions.
In an attempt to recoup some of those losses, they had shorted Nikkei futures, only to watch in disbelief as the market rebounded within days—resulting in even greater losses.
That disaster had led to the demotion of Yoshimura, a colleague of Nakamura's and once a top contender for an executive position. Nakamura remembered it all too well.
"And the ones who profited from that blunder by buying up futures at rock-bottom prices? Eldorado Fund."
Usami stubbed out his half-smoked cigarette in the crystal ashtray on the table.
"I don't know what kind of scheme they're running this time, but one thing's for sure: they're betting on an extremely low-probability event. Maybe they've grown overconfident after too many wins."
High risk, high return was one thing, but to Usami, this looked like nothing more than a losing gamble.
"Either way, we're looking at a game where we have a 70% or higher chance of winning. Let's just treat this as an opportunity to recover some of what we lost to those Eldorado bastards."
"…Yes, sir."
Nakamura nodded, but the unease gnawing at him refused to fade.
* * *
A Few Days Later
Reclining in the plush backseat, Seok-won pulled out his phone as it vibrated.
"Hello?"
[It's Landon. Do you have a moment?]
Seok-won turned his head slightly toward the car window. The large black Mercedes sedan carrying him was gliding across the Hannam Bridge.
"Go ahead."
[John Porter has completed all the CDS contracts with Japan's four major securities firms, just as instructed.]
Hearing the awaited news, Seok-won smiled, still holding the phone to his ear.
"Good. Tell John he did well."
The reason he had secured the CDS option contracts was simple—to amass as many U.S. dollars as possible ahead of the impending Asian financial crisis.
However, with Wall Street investment banks and hedge funds likely already assessing the vulnerabilities in Asian financial markets, he had chosen a different target—Japan's major securities firms.
These firms, still weighed down by the remnants of the bubble economy, had deep pockets but lacked the refined international financial acumen and intelligence networks of their Western counterparts.
In other words, they were the perfect marks—ripe for exploitation.
"I don't mean to be cruel, but they're about to become my personal dollar ATMs."
Muttering to himself, Seok-won pushed aside his thoughts and focused on what Landon was saying.
[The total option contract amount across the four securities firms comes to $12 billion.]
"And the premium?"
[For a three-year contract, they'll be paying $600 million in fees annually.]
"5%—not a bad deal at all."
Landon's voice took on a slightly concerned tone.
[But if the Asian market crash doesn't happen as expected, we'll be out $1.8 billion. Are you sure about this?]
"Not long from now, those Japanese securities firms will be kicking themselves for signing these contracts. Just wait and see."
[Well, your predictions have never been wrong before. I trust this will be no exception.]
Seok-won chuckled. "And what if, just this once, things don't go as expected?"
[Then there's nothing we can do about it. Even if we lose the full contract fee, it won't put a dent in the fund's assets.]
$1.8 billion was an enormous sum, but by now, Eldorado Fund had grown so massive that even such a loss wouldn't shake its foundation.
Smirking, Seok-won responded in a relaxed tone.
"Don't worry—it won't come to that."
[I certainly hope so.]