Swapping Risk

August 14, 2007 (LBO) – The Ceylon Petroleum Corporation (CPC), Sri Lanka’s state-owned petroleum firm has used a leveraged swap to hedge a small part of its oil imports during the past month with good results so far, officials said. Diesel spot prices had moved to around 84 dollars a barrel.

CPC is held back from moving out of zero cost collars due to fears that its management will get hauled up before parliament if a deal goes against the utility after paying an upfront premium.

De Mel says he is creating a fund out of hedging settlements received so far to try out plain vanilla futures or options and future date.

He has also called for a national hedging policy which will set parameters at prices which the country is willing to pay for oil, so that CPC can fix the prices at that level.

Economists point out that the country needs an automatic price adjustment formula to prevent global energy prices from hurting the country or government finances.

A hedging policy could only supplement this, not replace it. CPC hedged has hedged 100,000 barrels of diesel for six months with a floor of 81.50 dollars a barrel and a cap of 90 dollars a barrel with Citibank, Chairman Ashantha de Mel said.

In addition to h