The Showa Shell traders who turned a hedge into a $1B bet — and lost

Showa Shell Sekiyu was a Japanese oil company, a subsidiary of Royal Dutch Shell, formed in 1985 by the merger of Showa Oil and Shell Sekiyu. In 1993, the company's treasury department was tasked with a straightforward hedging mandate: protect the value of the company's income against a fall in the yen. Instead, the currency traders took advantage of weak internal controls to speculate on the dollar-yen exchange rate.

The traders built up a massive unauthorized position in foreign exchange forward contracts, betting on the direction of the yen. When the market moved against them, they doubled down, increasing the size of their bets in an attempt to recover the losses. The hole only grew deeper. By the time the losses came to light, the company had lost approximately $1 billion — five times its annual profits. The loss was equivalent to ¥166 billion at the time.

On February 20, 1993, Showa Shell announced the loss. The Tokyo Stock Exchange reacted instantly: the company lost half its market value in a single day. The treasury manager, who had tried to cover up the disaster rather than report it, was fired. The scandal was a stark reminder that a hedging desk without proper controls is a speculative desk, and that a trader under pressure will dig deeper rather than admit a mistake.