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Case Studies – Metallgesellschaft (MG)

  • It used stack and roll hedging strategy
  • In 1991, it offered fixed price contract for supplying gasoline for 5 to 10 years. In order to hedge
  • MG took long positions in near month futures and rolled the stack into next near month
  • contract every time by decreasing the trade size gradually so as to match the stack with
  • pending short position (in long term supply contracts)
  • MG bought futures on NYMEX to offset its forward commitments exposure with hedge ratio of one (every barrel was hedged)
  • As these derivatives were short-term thus MG had to roll them forward every month-end or
  • term-end till 5-10 years or the contract’s end
  • Company was exposed to rising spot prices. It eventually lost more than USD 1.5bn in 1993
  • It had various risk exposures ….such as Basis Risk, Market Risk, Funding Liquidity Risk

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