Derivative Probe

May 31, 2009 (LBO) – Sri Lanka’s police have raided the offices of state-run Ceylon Petroleum Corporation (CPC) and seized documents related to exotic oil derivatives which went against the utility, a media report said. The Sunday Times newspaper said officers of the criminal investigation department of Sri Lanka’s police had raided the head quarters of CPC Friday.

CPC bought derivatives in a failed bid to keep down import costs of oil and in a mis-guided attempt to ‘save’ foreign exchange.

The utility did not have a price formula to hedge its import costs, and politically directed pricing exposed it to frequent losses.

CPC chairman Ashantha De Mel was forced to resign over the deals following a court case which was subsequently terminated.

The Sunday Times said the former chairman may also be questioned over the deal.

The exotic option-based derivative position gave limited upside protection, but had greater downside risk, especially if prices fell steeply.

The deals which are due to run out by the middle of this year have been estimated to cost CPC between 600 to 800 million US dollars.

Standard Chartered Bank, Citi, Deutsche Bank, state-run People’s Bank and private lis