Answer: Suffered a significant decline in oil prices resulting in huge unrealized losses and subsequent margin calls.

## Explanation MGRM suffered a significant decline in oil prices, which led to massive unrealized losses and subsequent margin calls. The company used short-term futures to hedge its position due to a lack of alternatives, as the long-term futures contracts available were highly illiquid. ### Key Details: - **MGRM's open interest** in unleaded gasoline contracts was 55 million barrels in the fall of 1993 - **Average trading volume** was only 15-30 million barrels per day - The company encountered problems with **timing of cash flows** required to maintain the hedge - While cash flows would have canceled out over the entire hedge life, MGRM lacked **necessary funds** to maintain its position - The fundamental issue was **inadequate funds** to mark positions to market and meet margin requirements - The **significant decline in oil prices** exacerbated the situation, leading to huge unrealized losses and margin calls ### Why Other Options Are Incorrect: - **A**: Although MGRM did adopt a dynamic hedging strategy, it was not outdated or largely ineffective. The problem was not with the strategy itself but with liquidity and funding issues. - **B**: MGRM actually used short-term futures due to illiquidity in long-term contracts, not too many long-term contracts. - **C**: The problem was a decline in oil prices, not a failure to predict rising prices.

Author: Tanishq Prabhu