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Financial Innovation of Mass Destruction—The Story of a Countrywide FX Options Debacle

Author

Listed:
  • Anna Sławik

    (Institute of Economics, Finance and Management, Jagiellonian University, ul. Prof. S. Łojasiewicza 4, 30-348 Kraków, Poland)

  • Joanna Bohatkiewicz-Czaicka

    (Institute of Economics, Finance and Management, Jagiellonian University, ul. Prof. S. Łojasiewicza 4, 30-348 Kraków, Poland)

Abstract

Astonishingly little attention has been paid in academic literature to the 2008–2009 foreign exchange (FX) options debacle in Poland, the scale of which was unheard of. It affected not only an individual organization but a significant part of economy, being an example of a situation in which operational risk at the company level could have impacted systemic risk. The research provides evidence of the dark side of financial innovations through an analysis of a countrywide case on an emerging market, utilizing a primary qualitative content analysis (QCA) of over 750 documents (including press releases, public authorities’ accounts, and corporate statements). It documents that the FX options debacle was caused by financial institutions which shrouded some aspects of innovative securities or took advantage of information asymmetry to exploit uninformed clients. The study concludes that both adequate legal regulations and proper operational risk management are crucial to avoid similar corporate failures.

Suggested Citation

  • Anna Sławik & Joanna Bohatkiewicz-Czaicka, 2022. "Financial Innovation of Mass Destruction—The Story of a Countrywide FX Options Debacle," Risks, MDPI, vol. 10(2), pages 1-17, January.
    • Handle: RePEc:gam:jrisks:v:10:y:2022:i:2:p:28-:d:732416
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    References listed on IDEAS

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    1. Beck, Thorsten & Chen, Tao & Lin, Chen & Song, Frank M., 2016. "Financial innovation: The bright and the dark sides," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 28-51.
    2. Waldemar Gontarski, 2009. "Polish Toxic Currency Options," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 3(2), June.
    3. Anatoli Kuprianov, 1995. "Derivatives debacles: case studies of large losses in derivatives markets," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-39.
    4. Ashton, John K. & Hudson, Robert S., 2008. "Interest rate clustering in UK financial services markets," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1393-1403, July.
    5. Franklin Allen, 2012. "Trends in Financial Innovation and their Welfare Impact: an Overview," European Financial Management, European Financial Management Association, vol. 18(4), pages 493-514, September.
    6. Franklin Allen, 2012. "Trends in Financial Innovation and Their Welfare Impact: An Overview," DNB Working Papers 355, Netherlands Central Bank, Research Department.
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    Cited by:

    1. Wei Li & Serhat Yüksel & Hasan Dinçer, 2022. "Understanding the financial innovation priorities for renewable energy investors via QFD-based picture fuzzy and rough numbers," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-30, December.

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