Explanation:
Metallgesellschaft implemented a stack-and-roll hedging strategy, which uses short-term futures contracts to hedge long-term risk exposure. The stack-and-roll hedge strategy proved ineffective due to interim funding cash outflows created by margin calls and other factors. No offsetting interim cash inflows were available on their long-term customer contracts, creating a liquidity crisis that was exacerbated by their size of their futures positions in relation to the liquidity of the market. However, many economists believe that such a hedging strategy is fundamentally sound. Gains and losses on its customer contracts were realized if and when the customers took delivery, which would occur over a 5- to 10-year period.
(Book 1, Module 9.1, LO 9.a)
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Question 28
Which of the following statements is correct regarding the factors that led to the financial crisis at Metallgesellschaft Refining and Marketing?
A
There was a cash flow problem that constrained the company’s ability to fully execute the hedge already in place.
B
The maturity mismatch between its short and long positions is widely believed to have contributed to the problems.
C
The shift in prices so that the petroleum spot prices were greater than petroleum futures prices created a significant cash flow problem.
D
Gains and losses on customer contracts were realized when customers entered into the contracts.
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