MG was a huge, German industrial conglomerate that decided to open an energy trading office in the US in the early 90s.
MG was a huge, German industrial conglomerate that decided to open an energy trading office in the US in the early 90s. The original plan was threefold: Sell refined products in the forward, physical market. Invest in refining capacity to produce the products.
Hedge the forward sales through financial derivatives. When the strategy was first implemented incurrent physical prices were lower than the futures prices. So the sales contracts were set at those higher future prices.
And it meant that purchasing the "near" month futures contracts would be profitable. So MG developed a strategy whereby they would cover the long-term, fixed-price sales by buying contracts in these few, near months.
As each month "rolled-off," they would merely buy contracts in the next month. It was their intent to continue this process until the physical product sales contracts expired in 10 years.
This strategy worked as long as the futures market was "backwardated," whereby each successive month is lower than the prior one Lesson 3. One of the major flaws in this approach, however, was the volume of contracts being traded since they were "loading-up" on closer month contracts.
Add to that the fact that they would not get paid for the product sales for years out, and you begin to have a cash flow problem where margin calls are concerned. Their position in the Fall of was estimated to be between to million barrels stretched-out over the following 10 years.
Inprices fell as the market received a "bearish" signal from OPEC on production quotas. Faced with this position, MG management was changed and the new team was directed to close all positions.
The had to seek bailout funds from one of their banks, and in return, had to sell-off several divisions. Today, the German industrial giant no longer exists having been bought-out by a competitor.
Please watch the following video 6: Metallgesellschaft case on hedging disasters Click here for the transcript. This David Harper at Bionic Turtle with a very brief overview, just selected highlights for one of the key case studies for the FRM candidate.
This concerns the German company that goes by this name Metallgesellschaft that I will abbreviate to MG so as to not mispronounce the proper German name for the company.
And the case is about the very public disaster experienced by the company in the early s. It starts with the initial positions in which MG offered fixed-price, long-term contracts to deliver or supply heating oil and gasoline to its customers, independent wholesalers, and retailers.
So these initial positions were short positions in long-term forward contracts with maturities of 5 to 10 years.
How did the company hedge its exposure? It did this with what is called or by employing a stack and roll strategy, or a stack and roll hedge.
And so in this hypothetical example, each barrel might represent 10, barrels of oil. So that is to purchasebarrels of oil.
And right before expiration on those long positions in futures contracts, MG, the company, closes those out and enters into a new stack, a new set of short-term futures contracts where it takes a long position.
And so in this way, the company could go, say, month-to-month with this stack and roll. That is to say, buy it, go long a short-term stack, close that out, enter into another short-term stack, and keep doing that month-to-month.Nov 10, · In MG, the underlyings were short positions in long-term forward contracts to deliver oil.
The hedge was a stack-and-roll hedge: long positions in short-term. Metallgesellschaft AG Case Solution,Metallgesellschaft AG Case Analysis, Metallgesellschaft AG Case Study Solution, Metallgesellschaft AG is a commodity and engineering conglomerate in Frankfurt am Main, Germany.
Metallgesellschaft Corp, New York subsidiary of the group. Metallgesellschaft AG: A Case Study In December, , Metallgescellschaft AG revealed publicly that its "Energy Group" was responsible for losses of approximately $ billion, due mainly to cash-flow problems resulting from large oil.
Metallgesellschaft AG is a commodity and engineering conglomerate in Frankfurt am Main, Germany. Metallgesellschaft Corp, New York subsidiary of the group, made the oil trading and hedging errors that can lead a group in insolvency. Metallgesellschaft AG: A Case Study.
By John Digenan, Dan Felson, Robert Kelly and Ann Wiemert In December, , Metallgescellschaft AG revealed publicly that its "Energy Group" was responsible for losses of approximately $ billion, due mainly to cash-flow problems resulting from large oil forward contracts it had written.
Metallgesellschaft AG Case Study Solution & Analysis In most courses studied at Harvard Business schools, students are provided with a case study. Major HBR cases concerns on a whole industry, a whole organization or some part of organization; profitable or non-profitable organizations.