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Explanation:
The Metallgesellschaft (MG) case in 1993 is a classic example of liquidity risk arising from funding mismatches. MG hedged long-term forward commitments to sell oil with short-term futures contracts (a stack-and-roll hedge). When oil prices fell, they faced massive margin calls on the futures while the gains on the forwards were unrealized, leading to severe cash flow mismatches and liquidity failure.
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A
Negative public perception of emergency borrowing from the central bank can cause a bank run.
B
Positive feedback trading in illiquid instruments can cause excessive losses.
C
Hedging liabilities by rolling forward futures contracts may create cash flow mismatches.
D
Futures provide a better effective hedge for hedging commodities exposure than forwards.