Two sides of a currency crisis in emerging economies: economic and behavioural side of currency risk derivatives

This chapter aims to present the risks of currency derivatives as a cause of the financial crisis in emerging economies, as illustrated by currency options strategies issued in Poland in the second half of 2008. Those derivatives, which were also called 'toxic', offered zero-cost strategies and attractive exchange rates for exporters on the OTC market. Instead of taking a position in a plain vanilla currency option or forward contract, exporters decided to take a position in options strategies with very positive short-term characteristics (zero cost and attractive exchange rate) but with high risks in the long term (less attractive exchange rate, double volume in the case of negative payoffs). The abrupt depreciation of PLN in the second half of 2008 resulted in immense losses for Polish exporters. To explain the popularity and willingness to take positions in toxic options rather than in traditional hedging securities, we carried out the survey. The subject of the research is entrepreneurs, that is, micro, small and medium-sized enterprises operating in Poland (in the Podkarpackie Voivodeship). Entrepreneurs were asked about their involvement in toxic options in 2008. The goal was to explain the entrepreneurs' involvement in toxic options by examining the degree of knowledge about financial instruments and cognitive inclinations discussed in behavioural finance; for example, availability and conservatism heuristics, intuitive way of processing information and overconfidence effect were examined.