Explanation

The Metallgesellschaft case in 1993 is a classic example of hedging strategy failure due to cash flow mismatches. Here's why option D is correct:

Background: Metallgesellschaft AG, a German industrial conglomerate, sold long-term fixed-price oil contracts to customers while hedging these positions with short-term futures contracts that needed to be rolled over.

The Problem:

• When oil prices fell, the company faced margin calls on its futures positions
• However, the long-term contracts didn't generate immediate cash inflows to cover these margin requirements
• This created a cash flow mismatch - short-term cash outflows from futures hedging vs. long-term cash inflows from customer contracts

Key Lessons:

1. Rolling hedge risk: Using short-term instruments to hedge long-term exposures creates liquidity risk
2. Margin requirements: Futures require daily margin payments, unlike forwards which typically don't
3. Basis risk: The difference between spot and futures prices created additional complications

Why other options are incorrect:

• A: This describes a bank run scenario, not relevant to Metallgesellschaft's commodity hedging
• B: While illiquidity was a factor, the primary issue was cash flow mismatch, not positive feedback trading
• C: The case actually demonstrates the opposite - futures created more problems than forwards would have

The Metallgesellschaft case remains a textbook example of how seemingly sound hedging strategies can fail due to cash flow timing mismatches and liquidity constraints.