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Answer: Hedging liabilities by rolling forward futures contracts may create cash flow mismatches.
The case of Metallgesellschaft in 1993 best illustrates that hedging liabilities by rolling forward futures contracts may create cash flow mismatches. This is because Metallgesellschaft engaged in a strategy of hedging its exposure to oil prices by using futures contracts. However, as the contracts approached expiration, they were rolled over into new contracts at higher prices, leading to significant losses when the underlying oil prices fell. This resulted in a cash flow mismatch as the company faced margin calls and had to liquidate its positions at a loss. The correct answer is C, as it directly relates to the Metallgesellschaft case and the issue of cash flow mismatches due to margin calls. The other options are incorrect as they refer to different scenarios involving Northern Rock, LTCM, and the comparison between forwards and futures for hedging commodities exposure, which are not relevant to the Metallgesellschaft case.
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Question 42: A risk management professional within a financial institution aims to enhance their understanding of recent liquidity risk events by reviewing real-world cases. Among the various examples analyzed, which key lesson would be best illustrated by the case of Metallgesellschaft in 1993?
A
Negative public perception of emergency borrowing from the central bank can cause a bank run.
B
Positive feedback trading in illiquid instruments can cause excessive losses.
C
Hedging liabilities by rolling forward futures contracts may create cash flow mismatches.
D
Futures provide a better effective hedge for hedging commodities exposure than forwards.