Answer: Hedging liabilities by rolling forward futures contracts may create cash flow mismatches.

## 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.

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