The encyclopedia · Trading & Investing · Financial decision · 1994
Kashima Oil lost $1.5B on forex forwards — the same bet that sank Showa Shell
Japan's Kashima Oil lost $1.5B on foreign exchange forward contracts in 1994, a mirror of the Showa Shell disaster a year earlier.
Kashima Oil · 1994
What happened
Kashima Oil was a Japanese oil refining and importing company that, like many Japanese oil firms in the 1990s, used foreign exchange forward contracts to manage currency exposure from dollar-denominated oil purchases.
In 1994, the company suffered losses of approximately JPY 153.6 billion ($1.5 billion) from its foreign exchange forward positions. The loss occurred when the yen strengthened significantly against the dollar, causing massive margin calls on the forward contracts.
The case closely mirrored the Showa Shell Sekiyu disaster of 1993, where that company lost $1.49 billion on similar unauthorized FX forward contracts. Both companies had taken leveraged positions that were far beyond any reasonable hedging need, effectively betting that the yen would weaken rather than strengthen.
The loss was large enough to be recorded on the Wikipedia list of trading losses, though no dedicated Wikipedia article exists for the case.
Why it happened
- Kashima Oil took leveraged FX forward positions that were speculative — the scale far exceeded any reasonable need to hedge dollar-denominated oil purchases.
- The company bet the yen would weaken, but the yen strengthened dramatically in the early 1990s, triggering catastrophic losses on the forward contracts.
- Japanese oil companies engaged in a pattern of speculative FX trading — Showa Shell had the same loss a year earlier — suggesting a systemic governance failure.
The lesson
A hedge larger than the exposure it covers is not a hedge — it is a bet. The same mistake that sank Showa Shell happened again a year later at Kashima Oil.
Sources
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