2009 | 2(10) | 37-47
Article title

POLISH TOXIC CURRENCY OPTIONS (Polskie toksyczne opcje walutowe)

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Toxic currency options are defined on the basis of the opposition to the nature (essence) of an option contract, which is justified in terms of norms founded on the general law clause of characteristics (nature) of a relation (which represents an independent premise for imposing restrictions on the freedom of contracts). So-understood toxic currency options are unlawful. Indeed they contravene iuris cogentis regulations. These include for instance option contracts, which are concluded with a bank, if the bank has not informed about option risk before concluding the contract; or the barrier options, which focus only on the protection of bank's interests. Therefore, such options may appear to be invalid. Therefore, performing contracts for toxic currency options may be qualified as a criminal mismanagement. For the sake of security, the manager should then take into consideration filing a claim for stating invalidity (which can be made in a court verdict). At the same time, if the supervisory board member in a commercial company, who can also be a subject to mismanagement offences, commits an omission involving lack of reaction (for example, if he/she fails to notify of the suspected offence committed by the management board members acting to the company's detriment when the management board makes the company conclude option contracts which are charged with absolute invalidity) the supervisory board member so acting may be considered to act to the company's detriment. In the most recent Polish jurisprudence and judicature the standard of a 'good host' is treated to be the last resort for determining whether the manager's powers resulting from criminal regulations were performed. The manager of the exporter should not, as a rule, issue any options. Issuing options always means assuming an obligation. In the case of currency put options it is an absolute obligation to purchase a given amount in euro at exchange rate set in advance. On the other hand issuing call options confers an absolute obligation to deliver to the other party to the option contract a specified amount in euro at exchange rate set in advance. This latter position (short call) means unlimited loss in the case of appreciation of euro. This was the situation faced by some Polish exporters in the second half of 2008 who in the middle of 2008 issued the most risky call options for banks and, thus, they bought a currency risk from the banks. Issuing any option always means also buying someone other's risk, in exchange for a relatively small option premium which might trigger a relatively huge and actually unlimited risk of losses, if the assumed forecast does not come true. This is not the economic analysis of law to be relied on any more in respect of the cost of preventing the risk of loss being higher or lower than the amount of damage. The manager of an exporting company, unlike the speculator who sells options (buys risk), usually has no knowledge of financial engineering, which is essential to safely manage such excessive risk through creating a hedging portfolio.
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  • Waldemar Gontarski, Wyzsza Szkola Finansow i Zarzadzania, ul. Pawia 55, 01-030 Warszawa, Poland
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