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Case Title:

Oil Derivatives: The Failure of China Aviation Oilís Speculative Intent

Publication Year : 2010

Authors: S Chakraborty, K Ray, S Chaganty

Industry: Oil and Natural Gas

Region:China

Case Code: TRT0099IRC

Teaching Note:  Available

Structured Assignment:  Available

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Abstract:
China Aviation Oil Corp Ltd (CAO) was an overseas controlling subsidiary of the China Aviation Oil Holding Company. The core business of the CAO was to procure jet fuel from the overseas markets and sell it to different Chinese air line companies through its subsidiary. Besides, the company also provided value added services to its airlines' customers. Since 1993 the company had been facing serious problems due to the volatility of oil prices. In these circumstances, the CAO started derivatives trading on oil price. Initially CAO used derivatives for hedging oil price risk. Later on, it changed its option trading strategy and used derivatives products for speculative purpose. This strategy led the company to book $550 million loss by violating the corporate governance practices in Singapore.

Pedagogical Objectives:

  • To understand the mechanism of derivatives trading in the Singapore stock exchange.
  • To analyse the various options of trading strategies in oil.
  • To discuss the essence of corporate governance in the backdrop of CAO.

Keywords : China; Chinese oil demand; Unsystematic risks; Oil price risks; Diversification strategy; Derivatives; Singapore Exchange Ltd (SGX) ; Singapore exchange derivatives market; China Aviation Oil Corp Ltd; Core business of the China Aviation Oil (CAO); China Aviation Oil Holding Company; Speculative trading in fuel ; Bullish view of oil prices; Put options and call options; Option premium; New York Mercantile Exchange (NYMEX)

Contents:

  • Chinese oil Market and China Aviation Oil
  • Financial derivatives in Chinese oil sector
  • China Aviation Oil
  • China Aviation Oil's Debacle in Oil Derivative Trading

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