Explanation:
Although adverse price movements caused losses in the long positions used to hedge the short exposure, it was the inability—or undesirable choice—to meet margin calls associated with those losses. If Metallgesellschaft had been able to meet the margin calls in the short-term, the longer-term strategy would have resulted as planned.
(Book 1, Module 9.1, LO 9.a)
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Question 74
Metallgesellschaft constructed an interesting position for its clients that was designed to protect against rising oil prices. The stack-and-roll strategy employed was relatively new at the time, and in the long-term, it would have generated the appropriate result. The failure of this strategy in the short-term was mainly attributable to which of the following factors?
A
Liquidity issues with respect to meeting margin calls.
B
Credit issues from client counterparties.
C
Regulatory issues from environmental matters.
D
Adverse price movements in the oil markets.
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