Citic Pacific plummets after $2 billion derivatives loss

Shares in Citic Pacific, the Hong Kong arm of the Chinese state investment company Citic, fell 55% today after the company admitted a $2 billion loss on poorly-managed forex hedges.

Citic Pacific suspended trading on the Hong Kong stock exchange yesterday at 0930 local time before announcing a total loss of HK$15.5 billion ($2 billion) on its holdings of leveraged forwards on the Australian dollar, euro and renminbi.

The company held target redemption forwards in Australian dollars, euros, and renminbi and daily accrual forwards in Australian dollars, in order to hedge the forex exposure of an iron ore mining project in Australia. However, the contracts lacked loss knockouts.

Citic Pacific only realised the potential this gave for massive mark-to-market losses on September 7 - since then it has lost HK$807.7 million in closing out some of the contracts early and buying other forwards to replace the hedges, it said yesterday.

In addition, mark-to-market losses on the remaining forwards would be HK$14.7 billion by December 31 at current prices and exchange rates - and losses could continue to mount until the contracts expire in October 2010. Citic Pacific has agreed a $1.5 billion loan facility from the Chinese parent company, Citic, which owns 29% of Citic Pacific through its Hong Kong subsidiary.

The company's chairman, Larry Yung, blamed its finance director, Leslie Chang, and financial controller, Chi Yin Chau, for failing to get his approval for the contracts. Both have resigned.

Citic's shares were at HK$6.52 at 1000 GMT (1700 local time) today, down 55.1% from their opening price.

See also: Caisse d'Epargne management step down after losses
Caisse D’Epargne hit by unauthorised derivatives loss
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