China Aviation Oil Case Study

1077 Words 5 Pages
Derivatives e.g swaps and futures are mainly used to assist CAO (China Aviation Oil) in enhancing their procurement proficiency and hedging tool in the beginning to reduce the risk in their daily trading activities.
Eventually derivatives are used in speculative trading without having a proper risk management environment in place in hope to gain more profit from the positive market movement. When the trading was done at the start, Mr Chen Juilin the managing director and CEO of the company, was able to foresee the market condition hence allowing him to profit from there. As time passes Mr Chen thought he understood the market well enough and he moved on to making several speculative contracts with the bank, when the market movements did not
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Besides that, the company also has an unrealized loss of about US$160 million which amounted to the total derivative losses to US$550 million.
However, these losses have been covered up by manipulating the figures using the wrong assessment method by taking the intrinsic value as the fair value of the derivative on the company’s financial statements. In other words, they are ignoring the maturity, volatility, interest rates that are taken into consideration when calculating fair value amount to present an unrealistic figures to the public and the shareholders.
To make matter worse, CAO participated in high-risk portfolio options of larger volume to increase the amount of premiums to mask the losses made
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This granted him of information that was discussed among the Board which allows him to be able to prevent the people from making independent selection. Apart from that based on the table below, although their responsibilities were quite similar, they is a slight difference in how their roles work. So previously when Mr Chen was able to perform dual role in the company, it allow him to take care of the day to day operation as well as the affairs of the business/company. This creates an opportunity for him to take advantage of it and decide when he is both the Group and the business. In another words, what he thought to be good for the group, may not be good for the business. For instance the case where he took higher risk profiles in the attempt to cover up losses made by other transactions, he was concern for the profit of the business so it may not seem wrong for him to do that. But to the group in the faith that the shareholders have placed him as the managing director, he is not performing like what he is supposed to do, this creates a conflict of interest for him when he is acting as both the MD and the CEO. Hence, I would separate the role of the MD and CEO to 2 individuals so that there will be control over the information between those

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