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Answer: All of the above
All of the statements are true: - **Contango** can create rollover losses when the hedge is repeatedly rolled forward. - **Futures price declines** on the long futures positions can generate margin calls and strain cash flow. - The **paper gains** on the long-dated forward exposure may not be realizable immediately, so they cannot offset short-run futures losses. Therefore, the correct answer is **All of the above**.
Author: Manit Arora
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Q-156.4 Rolling the hedge forward
Metallgesellschaft rolled forward short-dated LONG positions in oil futures (i.e., stack-and-roll) to hedge long-term delivery obligations (long-dated SHORT forward positions). Which of the following is TRUE about the underlying exposure and stack-and-roll hedge employed by Metallgesellschaft?
A
Contango created rollover losses on the roll return (roll yield)
B
Futures price declines caused margin calls which hurt the company’s cash flow
C
Paper gains in the long-dated forward contracts could not be realized to offset short-run losses on the futures contracts
D
All of the above
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