Zero Sum

Nov 11, 2008 (LBO) – Sri Lanka’s state-run Ceylon Petroleum Corporation is looking at ways to cap losses from hedges that went against it by entering into opposite positions, Chairman Ashantha de Mel said. “I can take a producers hedge where it is upside down compared to the normal one going up and I can collect on the downside,” says de Mel.

“But the downside is I can’t defend that risk as the prices, if they start rising, I’ll have to pay the balance.”

But CPC has also exhausted most of the lines with banks it deals with.

Zero Cost

CPC has hedged about 30 percent of its imports through a zero-cost structure using options. Zero cost structures operate with the CPC writing an option and using the premium to buy one.

By writing more than one option, and getting multiple premiums, CPC had ‘leveraged’ its zero cost structure. But when the position went against the utility, it had to buy twice the volume at a price higher than the market for a longer period.

De Mel said CPC had originally hedged “550,000 to 600,000” barrels but leveraging in the swap contracts the utility has entered into had bloated volumes to 900,000 suddenly when oil prices collapsed.

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