Chennai Petroleum Corporation (CPCL) hedging on MCX
Chennai Petro looks to hedge on MCX
Chennai Petroleum Corporation (CPCL), an IOC group company, will shortly begin hedging on MCX joining companies such as IOC, Tata Petrodyne and SpiceJet which hedge themselves partly against crude oil price risk and volatility by taking exposure to crude oil futures traded on the commodity bourse.
MCX is understood to be in talks with BPCL and HPCL, the other two state-owned refiners, and Air India to use its trading platform for hedging and thus adding to the liquidity of the crude contracts. "We are in the process of getting into the over-the-counter (OTC) market for hedging ourselves against volatility by buying crude oil and selling petroleum products forward," said NC Sridharan, director, finance, CPCL. "We have decided to test the market by enrolling with MCX. By June-end, we would have done half a dozen transactions on the bourse. We propose to enter the offshore OTC market by July with IOC having vetted the agreements being signed between us and the counterparties, which are the ones that IOC does forward transactions with. We will use MCX to hedge our African and Gulf crude oil exposure and the OTC market to sell petroleum products forward." State-owned firms as well as private refiners such as Essar use the more liquid over-the-counter (OTC) market to sell forward the spread or difference between products such as a barrel of diesel and a barrel of crude to banks and trading outfits of major oil companies operating out of Singapore, Hong Kong, Dubai, Tokyo and Sydney.
Metals and energy exchange MCX has been offering futures trading since late 2003 and its average daily volume of crude oil traded in the calendar year through April has been 13 million barrels. However, Indian commodity futures markets are yet to achieve the scale that will enable genuine users to increase their presence in the market. This is because an important legislation (FCRA Act, 1952 Amendment) that will facilitate the entry of banks mutual funds into the market is pending passage by Parliament. "We have been hedging on MCX, albeit not in a big way, for the past two years. Our exposure has to be covered typically for nine months to a year so far. Month contracts must have liquidity, which we find on the OTC market where we do most of our hedging," said SV Narasimhan, director, finance, IOC.
Forward contract is customised
An exchange-traded futures contract facilitates the purchase or sale of an asset at a predetermined price for delivery at a future date, thereby allowing an entity to lock in the price of its raw material or end product A forward contract is similar to a futures contract except that, unlike a futures, which is a standardised contract traded on an exchange, it is a customised contract entered into between two counterparties on the over-the-counter market A benefit that a futures transaction affords over an OTC contract is the removal of counterparty default risk, which is borne by the exchange.
Economic Times, New Delhi, May 10, 2010
