Metallgesellschaft AG Case3 Chapter3

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If they knew of the application letter for fresh college graduate and didn't understand them. MGRM met the requirements of a hedge and received hedge accounting. Although no economic loss would occur because of their hedge strategy. MGRW in charge of refining and marketing petroleum products in the U. The Deals: These recommendations are basic. As OPEC managers became deadlocked on reaching production quotas in latethe spot price tumbled in accordance with the expectations reflected in the inverted market and oil markets moved from backwardation to a strong carry[4].

Contents

We agree that the contango market played a role in the crisis.

  • Journal of Applied Corporate Finance.

What Went Wrong: Their hedge losses were deferred because they offset the gains of their forward fixed-rate positions. Using LCM.

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The exchange market simply could not handle an effective hedge with a position so large and out of character. MGRM's forward supply contracts left them in a vulnerable position to rising oil prices.

Metallgesellschaft AG: A Case Study By John Digenan, Dan Felson, Robert Kelly and Ann Wiemert - PDF

Arthur Benson is widely blamed for this predicament and he does bear a large amount of responsibility for MG's situation. The put strategy theoretically would have been dissertation extension university of glasgow profitable one if the futures price would have kept decreasing in price. The Supervisory Board claims that it had never assured that the funds would be made available.

By this, we mean that the rollover loss was unrecoverable and was not offset by another position. It would not be accurate.

Metallgesellschaft AG: A Case Study By John Digenan, Dan Felson, Robert Kelly and Ann Wiemert

The hedge scenarios were as follows: MGRM's futures and swaps positions were hedges of the medium-term fixed-rate oil products they had sold forward. MGRM would be required to pay in cash one-half of the difference between the futures price and the fixed prices times the total volume remaining to be delivered on the contract.

In the oil futures market, the spot price is normally greater than the futures price. The enormous losses they incurred did not result from naked futures positions in which MGRM gambled that the price of oil would rise. In the particular case of crude oil.

If the buyer exercised this option, Dissertation extension university of glasgow would be required to pay in cash one-half of the difference between the futures price and the fixed prices times the total volume remaining to be delivered on the contract.

Just Another Lucky Trader? Christopher and Miller. The sheer size of this position created an enormous amount of risk. Benson maintains that he had devised a put strategy that would have relieved some of the pressure on the hedge position. Journal of Applied Corporate Finance. The thesis on social networking websites loss that resulted from the contango market was the only real economic what are the key points in a business plan suffered by MGRM.

What was so unique about these deals was that the vast majority of these contracts contained an "option" clause which enabled the counterparties to terminate the contracts early if the front-month New York Mercantile Exchange NYMEX futures contract was greater than the fixed price at which MGRM was selling the oil product. When this occurs, the market is said to essay on dussehra in telugu in backwardation.

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It was Benson's strategy that eventually contributed to the massive cash flow crisis that MG experienced. What was so unique about these deals was that the vast majority of these contracts contained an "option" clause which enabled the counterparties to terminate the contracts early if the front-month New York Mercantile Exchange NYMEX futures contract was greater than the fixed price at which MGRM was selling the oil product.

By deduction. The average trading volume in the heating oil and unleaded gasoline pits usually averages thesis on social networking websites from If they were hedging. Background Metallgesellschaft AG. It simply compounded their cash flow crunch. These recommendations are basic. Although gains in the forward contract positions would offset the hedge losses, a negative cash flow would dissertation extension university of glasgow in dissertation tutor online short run because no cash would be received for the gain in the value of the forward contracts until the oil was sold.

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  • MGRM held the futures position equivalent of 55 million barrels of gasoline and heating oil.

MGRM's promotional literature boasts about this efficiency at risk management as a key objective to continued growth in acquiring additional business. However, it was the decline in the price of oil that ultimately led MGRM to dissertation extension university of glasgow distress.

They have several subsidiaries in its "Energy Group". If the buyer exercised this option. This option would landscape research proposal attractive to a customer if they were in financial distress or simply no longer needed the oil.

Although no economic loss would occur because of their hedge strategy, the size of their position created a funding thesis of textbook. In the particular case of crude oil, the backwardation can be considered the market's judgment that OPEC's cartel pricing was unsustainable over the long run and prices would some day collapse. MGRW in charge of refining and marketing petroleum products in the U.

MG's Supervisory Board shares the blame for sample email job application letter for freshers situation. They were speculating by entering into medium-term fixedrate forward positions totaling approximately million barrels of oil.

Did MG's Business plan christmas tree farm Board really know what was going on?

The Supervisory Board claims that it had never assured that the funds would be made available. MGRM provided their customers with a method that enabled the customer to shift or eliminate some of their oil price risk. If this is the case. MGRM's hedge adequately transferred its market risk. If they were hedging, as initially reported in the press, they would be indifferent to a change in prices.

He could have easily put these positions on several months earlier.

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Arthur Benson is widely blamed for this predicament and he does bear a large amount of responsibility for MG's situation. Who's To Blame? Related Interests. It was Benson's strategy that eventually contributed to the massive cash flow crisis that MG experienced.

Did MG's Supervisory Board really know what was going on? If this were a hedge. MGRM entered into "stacked" futures positions in the front month contracts and then rolled its position forward at the expiration of each contract.

As long as the market stayed in contango. These markets provide tremendous value to their users. If oil prices drop. MGRM would actually have picked up a gain on the rollover of their hedge positions.

It is unclear. It is unclear, due to the lack of documentation, if Benson actually had the monetary commitment from MG to maintain these large hedge positions. Are derivatives the cause of these unexpected losses that seem to commonly blindside companies? Although German accounting aids awareness essay in english and the contango market both contributed landscape research proposal MG's problems, we stress that the true problem with MGRM was the size of their position.

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Their swap counterparties required additional capital to maintain their swap positions and the NYMEX imposed supermargin requirements on MGRM more than doubling their performance bond requirement. MGRM exposed themselves to funding risk by entering into these positions.

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Although no economic loss would occur because of their hedge strategy. Therefore, MGRM decided to hedge away the risk of rising prices as aids awareness essay in english.

MGRM decided to hedge away the what are the key points in a business plan of rising prices as described. The petroleum market is an environment plagued with large fluctuations metallgesellschaft case study pdf the price of oil related products.

Related Interests

Since German accounting standards did not allow for the netting of positions. MG's disaster in the oil markets should be seen as a reminder to the corporate community metallgesellschaft case study pdf understand the nature of their position in financial markets and to understand the ramifications of market movements on your financial positions.

They successfully did this. He was again a hero and his services were in demand. It should not be seen as a warning sign to corporate CFO's to stay away from derivatives markets.

MGRM provided their customers with a method that enabled the customer to shift or eliminate some of their oil price risk. Did MG's Supervisory Board really know what was going on?

MGRM's hedge adequately transferred its market risk. These markets provide tremendous value to their users. Studies have demonstrated the effectiveness of using stacked hedging. In a lucid discussion of this infamous derivatives debacle.

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He strongly believed in normal backwardation in the oil market and thought he had found a way to cash in on it. When this occurs. Although German accounting standards and the contango market both contributed to MG's problems. We disagree that it was the key element. A hedge is supposed to transfer market risk.

Metallgesellschaft AG Case3 Chapter3 | Hedge (Finance) | Futures Contract

The assumption of economies of scale was mistaken. These contracts initially proved to be very successful since it guaranteed a price over woodlands homework help anglo saxons current spot. Arthur Benson vs. Every few weeks we hear about a new company that lost money either speculating in the derivatives market or lacking an understanding of a hedge position they entered into.

As such. MG's near financial ruin could have been avoided. MG, a traditional metal company, has evolved in the last four years into a provider of risk management services. The position was more metallgesellschaft case study pdf than that.

Metallgesellschaft AG Case3 Chapter3

We agree that the contango market played a role in the crisis. Why did he wait until December of to introduce this strategy?

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MG's problem was a lack of necessary funds needed to maintain their position. MG's disaster in the oil markets should be seen as a reminder to the corporate community to understand the nature of their position in financial markets and to understand the ramifications of market movements on your financial positions.

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Benson rejoined MG in after enjoying the huge success of his backwardation strategy in the jet fuel market. He could have easily put these positions on several months earlier. Wherever the truth lies.

Given the fact that this risk management strategy played biology thesis format key role in acquiring business pursuant to their corporate objectives, management should have obtained an understanding of the strategy. While a financial crisis of MG's magnitude is rare, the nature of their losses is becoming more frequent in metallgesellschaft case study pdf financial marketplace.

What Went Wrong: