德国金属公司metallgesellschaft.pdfVIP

Metallgesellschaft’s Hedging Debacle Anand Shetty, Iona College John Manley, Iona College Abstract This case investigates when hedging does not reduce risk, but rather may increase risk. INTRODUCTION Metallgesellschaft Corporation (MG) is the subsidiary of Metallgesellschaft A.G., a German conglomerate with 15 major subsidiaries closely held with over 65% of stock owned by institutional investors including banks. In 1993, MG’s trading subsidiary, MG Refining and Marketing (MGRM), established very large energy derivatives (futures and swaps) positions to hedge its price exposure on its forward-supply contracts to deliver gasoline, diesel fuel and heating oil (about 160 million barrels) to its customers over a period of ten years at fixed prices. The counter-parties to forward contracts were retail gasoline suppliers, large manufacturing firms, and some government entities. The central premise of their forward contracts is to supply oil at fixed price to independent retailers who often face severe liquidity crisis and squeezes on margin when oil prices rise. It believed it is possible to arbitrage between the spot oil market and the long-term contract market. This arbitrage required skilled use of the futures markets in oil products, and this was to be MGRM’s stock in trade. THE HEDGING STIUATION MGRM developed several novel contract programs. First, it offered a “firm-fixed” program under which the customer would agree to a fixed monthly delivery of oil products at a set price. (102 million barrels of oil products were obligated under this program by September 1993). Second, it offered a “firm-flexible” contracts under which the customers were given extensive rights to set the delivery schedule for up to 20% of its needs in any year,