Tied Hands

July 25, 2011 (LBO) – The chairman of Sri Lanka’s state-run Ceylon Petroleum Corporation, Ashantha de Mel had “no choice” but to use zero costs derivatives to which went against him when oil price fell “dramatically” in 2008, according to a ruling by a London court. A London court which dismissed a counter claim by CPC that that de Mel and finance manager Karunaratne had no capacity to enter into contracts with banks, has said Sri Lanka’s cabinet of ministers had asked him to hedge oil “without delay.”

Court has also ordered the payment of 163 million US dollars by CPC to Standard Chartered bank which is being appealed by the petroleum utility.

No Choice

“He had no choice in the matter,” London Commercial Court Judge Hamblen found in a judgement where complex derivatives were clinically dissected.

“His preferred hedging strategy was a call option. However, this would have involved a significant premium and it was made clear to him that this would be unacceptable.

“He therefore had to fall back on the alternative of a ZCC (Zero Cost Collar).”

A Zero cost collar was an options position where price protection was given within a band where the money to buy an option (the premium) was raised by selling an option (and taking downside