ACL Cables, a listed Sri Lankan cable maker, said it had been hit with un-quantified losses on derivatives bought to hedge against changes in copper prices.

The firm,in a stock exchange filing, gave a profit warning Friday saying it expected "a significant decline in the company’s profitability following exposure to hedging contracts" in copper.

Copper is a key raw material in electrical and other cables.

ACL Cables said it hedged copper prices as a part of its "routine business risk management operations for stabilizing prices," of copper which was its base raw material.

In the past such contracts have given it "hedging gains" but the collapse in commodities this year "has resulted significant financial exposures" the firm said, without quantifying the losses.

"An exact overall quantification of the exposure is not possible since it would depend on fluctuations of the global copper prices over the next few months," the firm said.

Internationally, derivative contracts are accounted for in two ways. Some complex derivative positions using options are accounted for as investments, and have to be marked to market and the balance passed to the profit and loss account.

Others, including straight forwards, can be adjusted against the balance sheet under rules governing hedge accounting.

There are complex rules governing the separation of ‘hedges’ and ‘non-hedges’.

The firm did not disclose its accounting treatment.

The collapse of the commodity bubble, which was predicted by classical monetary economists when the underlying sub-prime bubble broke in 2007, has left many firms, with high prices, including airlines with high fuel prices in 2008.

These include international airlines which hedged fuel, which are their main cost component.

Sri Lanka’s petroleum retailers have also hedged up to a third of their oil imports.

State-run Ceylon Petroleum Corporation is estimated to have suffered losses in excess of 800 million dollars, and the contracts have since been suspended by court, amid allegations of corruption.

Unless firms bought plain vanilla options, which need not be exercised, most other derivative positions, including exotic positions built by writing options, cannot be unwound without costs.