Upside Protection

February, 20 (LBO) – Ceylon Petroleum Corporation wants to hedge 300,000 barrels of diesel before the end of the month, but is looking for better upside protection, an official said. Firms like Sri Lankan airlines hedges more than 70 percent of its oil though it is done by Emirates in Dubai.

Last week it bought an options collar through Standard Chartered Bank giving two dollars of protection below the spot price for 150,000 barrels of diesel for three months starting at 70 dollars.

“We want to hedge more diesel, but we want protection at higher levels,” Ceypetco Chairman Ashantha de Mel told LBO.

Ceypetco sells around 900,000 barrels of diesel a month and it now wants to try hedging crude oil as well.

The Ceypetco at the moment is trying to avoid paying premiums and is using costless or zero-cost trading strategies where proceeds for selling a put are used to fund calls.

Last week Standard Chartered won out over other contenders by selling a put at 67.50 dollars a barrel and funding a call at 72. But it only gave protection up to 74 dollars.

“This mean Ceypetco will have to pay us the difference if the diesel price falls below 67.50,” says Rukshan Dia