Derivatives Blow Up

I haven't seen too many comments of the China Aviation derivatives fiasco around the net. In fact, I don't know how I missed it myself. It looks like last October was a classic short squeeze which coupled with uncertainty surrounding the election drove oil prices to their highs. The story is that the firm lost $550 million partially due to rising oil:


The oil-trading company said last week it ran up losses as crude-oil prices surged to a record $55.67 a barrel in October.

``Financial difficulties of the company are due to trading losses and critical cash flow problems as a result of its losses in the trading of derivatives and the requirement to place margin deposits with counter-parties as a result of the losses,'' Chen said in an affidavit filed with Singapore's High Court on Nov. 29.

China Aviation first reported the transactions to its Beijing-based parent, China Aviation Oil Holding Co., on Oct. 10, Chen said in the affidavit.

Also under investigation is the sale of a S$196 million ($120 million) stake in the company by its state-run parent in October. The sale, managed by Deutsche Bank AG, was to raise funds to cover margin calls, or demands for funding, on the company's derivative positions, Chen said in the affidavit.

Singapore has arrested the chief executive.

There are always rumors whenever there is a sharp rally in any market that somebody is on the wrong side and is about to blow up. Undoubtedly, they probably aren't the only ones who suffered steep losses.

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This page contains a single entry by Bob published on December 29, 2004 2:58 PM.

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