Explanation:
Hedging liabilities involves using futures contracts to protect against potential adverse movements in prices or interest rates. Rolling forward futures contracts refers to the practice of closing out existing contracts and simultaneously opening new contracts with extended maturity dates. It introduces the risk of cash flow mismatches. This occurs because the cash flows associated with the futures contracts may not align perfectly with the cash flows of the underlying liabilities being hedged.
B is incorrect. Both forwards and futures can serve as hedging tools for managing commodities exposure, but they can introduce liquidity risk when there is a cash flow mismatch.
C and D are incorrect. These were not issues in the case of Metallgesellschaft.
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Q.5383 While delivering a training session on liquidity risk to newly recruited individuals, Jane Doe, a risk manager at the national regulator, discusses the insights gained from the collapse of Metallgesellschaft. Which of the following lessons regarding liquidity risk failures would be most effectively exemplified by the case of Metallgesellschaft in 1993?
A
Cash flow mismatches may occur when hedging liabilities by rolling forward futures contracts.
B
Compared to forwards, futures offer a more effective hedge for mitigating commodities exposure.
C
A bank run can be triggered by a negative public perception of emergency borrowing from the central bank.
D
Excessive losses can arise from positive feedback trading in illiquid instruments.
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