The loss mechanism was a liquidity mismatch: short-dated futures used to hedge long-term fixed-price commitments required daily margin, draining cash when prices moved adversely. Rolling those futures exposed the firm to funding shocks even though the economic hedge was directionally sound.

Things to Remember

• Short-tenor hedges for long-tenor exposures create rollover & funding risk.
• Daily margin calls can topple otherwise “hedged” positions if liquidity buffers are thin.
• Stress-testing must include cash-flow scenarios, not just economic P&L.
• Practical example: utilities hedging multi-year sales should align hedge tenor to contract tenor or secure committed credit lines for margin spikes.
• Common pitfall: equating economic hedging success with liquidity sufficiency.