Thursday 2 December 2004

Burnt by oil derivatives, CAO sits out market rally

Like most of Asia, the Singapore stock market rose strongly today on the back of the overnight fall in oil prices. The Straits Times Index closed at 2062.76, up 1.2 percent.

One stock that did not participate in the rally was China Aviation Oil (CAO), which had been suspended after reporting a loss of S$900 million from trading in oil derivatives.

Market questions China Aviation Oil's huge losses
Analysts have reacted with shock to the announcement by China Aviation Oil (CAO) that it had lost some S$907m from trading oil derivatives. The fiasco is now shaping up to be Singapore's second biggest trade-related corporate debacle, after the fall of Barings Bank in 1995... [A]nalysts said the company had possibly betted incorrectly on the movements in oil prices... The loss of S$907m from derivative trades means CAO is technically insolvent, since it has a net equity of just S$245m...

Playing with derivatives is like playing with fire. Companies -- and individuals as well -- who are not careful in playing with them are likely to find themselves getting burned.

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