Hedging Profits

April 15, 2008 (LBO) – Sri Lanka's state-run Ceylon Petroleum Corporation (CPC) said it had earned profits of 7 million US dollars in March reducing losses from retailing petroleum below-cost in that month. . "In March we lost 3,769 million rupees retailing fuel, but a hedging contract with Citibank earned us about 580 million rupees," petroleum minister A H M Fowzie told reporters.

"Since we started hedging we had earned about 1,100 million rupees from six contracts."

CPC uses complex zero cost options structures which they can carry without paying a premium up front.

"The international commodity markets are extremely volatile, in particular oil prices," Dennis Hussey, chief executive of Citibank Sri Lanka, said.

"We are talking about a situation where prices are not just high, but more than that, volatility is high, on a daily and a monthly basis.

"Hedging is a tool that is very valuable if used carefully. By and large it is best used to iron out volatility in prices."

CPC chairman Ashantha de Mel said the utility had earned more than 7 million dollars in hedging contracts it ran with two banks.

In one deal with Citibank CPC had hedged 200,000 barrels of crude with a