Answer: Stack-and-roll

The correct answer is A. **Stack-and-roll**. **Explanation:** Metallgesellschaft Refining and Marketing (MGRM) used a **stack-and-roll hedging strategy** to hedge their long-term forward contracts for oil delivery. Here's why: - **Stack-and-roll strategy**: MGRM sold long-term forward contracts (up to 10 years) to supply oil at fixed prices. To hedge these positions, they used short-term futures contracts (typically 1-3 months) and "rolled" them forward as they expired. This created a mismatch between the long-term forward exposure and short-term futures hedging. - **Why not other options**: - **Delta hedging (B)**: While delta hedging is a common dynamic hedging strategy, it's typically used for options positions, not the specific strategy employed by MGRM. - **Stop-loss strategy (C)**: This involves setting predetermined exit points for positions, which wasn't the primary hedging approach used. - **Dynamic delta-hedging (D)**: This is a more general term for continuously adjusting hedge ratios, but doesn't specifically describe the stack-and-roll approach. **Key Risk**: The stack-and-roll strategy exposed MGRM to significant **basis risk** and **rollover risk**, particularly when the oil market shifted from backwardation to contango, leading to substantial losses during the rollover of their short-term futures positions.

Author: Tanishq Prabhu