How not to use Derivatives.
In theory, Derivatives (Forwards, Futures, and Options) are a perfect way to hedge asystematic risk in markets. China Avation Oil (CAO) Singapore, however, didn't manage to use them very effectively... it lost around $550 million. In effect, they used derivatives as financial leverage once they started losing money rather than recgonizing their losses and closing their positions... basically gambling that the oil market would drop. (They shorted oil futures.) When they lost that bet, they doubled down.
Financial Times is reporting that the Chinese Gov't, which backs CAO, has really shrugged off the controversy. Their response has been so tepid that it is raising broad fears that the Chinese Gov't backed industries may not really be backed at all.
Because of poor lending practices some Japanese banks such as Mitsui have substantial exposure to this failure-- American and British banks are not as exposed. This failure rings of the Bearings Bank failure in the early 90's in both cases the trading operation did not monitor its staff well enough though in the Bearings case it was a rogue trader, not an executive, who managed to break the bank.
