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Metallgesellschaft
Metallgesellschaft
Metallgesellschaft
Metallgesellschaft
Metallgesellschaft
Metallgesellschaft
Metallgesellschaft
Metallgesellschaft
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Metallgesellschaft

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Derivative Analysis

Derivative Analysis

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  • Contango: Future price > Spot price when oil prices drop, the gains from the sale of oil are realised in the long-term, but the losses from the energy futures will be realised immediately. Thus, when oil prices dropped, the company faced a cash flow crisis. In December 1993, the company cashed in positions at a loss that totalled more than $1 billion.
  • Negative cash flows creating a liquidity crisis Credit risk The risk that a loss will be experienced because of a default by the counterparty in a derivatives transaction. Rollover risk when they close one short-term contract and into another short-term stack, the oil price may be changed, so the cost of hedge also may become higher.
  • Transcript

    • 1. Leon (Gangming Liang)
    • 2. Preview <ul><li>Background </li></ul><ul><li>Deal and strategy </li></ul><ul><li>What Went Wrong </li></ul><ul><li>Alternative Course of Action </li></ul><ul><li>Conclusion </li></ul>
    • 3. Background <ul><li>Metal company </li></ul><ul><li>A provider of risk management services in 1989 </li></ul><ul><li>MGRM </li></ul><ul><li>December in 1993, $ 1,800,000,000 </li></ul>
    • 4. 160,000,000 MG Customer Short-position Long-term forward contracts
    • 5. Hedge <ul><li>long-position </li></ul><ul><li>short-term </li></ul><ul><li>future contracts </li></ul>
    • 6. From Backwardation to Contango <ul><li>Oil price drop </li></ul><ul><ul><li>June, 1993  $19 per barrel </li></ul></ul><ul><ul><li>December,1993  $ 15 per barrel </li></ul></ul><ul><li>When oil prices drop </li></ul><ul><ul><li>Value of forward contract  increase </li></ul></ul><ul><ul><li>Value of future contract  decrease </li></ul></ul>
    • 7. What Went Wrong <ul><li>Too Long-term Forward contract </li></ul><ul><ul><li>Increasing credit risk </li></ul></ul><ul><ul><li>Hard to find another 10 years long-term contract to hedge </li></ul></ul><ul><li>Stack-and-Roll Strategy </li></ul><ul><li>Wrong Hedge Ratio </li></ul><ul><li>Wrong Derivative </li></ul><ul><ul><li>Future </li></ul></ul><ul><ul><li>Increasing funding and liquidity risk </li></ul></ul>
    • 8. Alternative Courses of Actions <ul><li>Lower Hedge Ratio (< 1:1) </li></ul><ul><li>Short- Term Investment (Future) </li></ul><ul><li>Foresight (Key Risks & Potential Risks) </li></ul><ul><li>Warning (Schimmelbusch, June) </li></ul><ul><li>Communication (MG & MGRM) </li></ul>

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