Sunday, February 08, 2009

An imperfect hedge: the case of Metallgesellschaft

If you have had me for MBA 610 you know in the "what can go wrong" with derivatives part of the class we usually discuss Metallgesellschaft. It is a classic case of when an imperfect hedge can really hurt you. I just stumbled upon this six minute explanation of what caused their problems that is very good.


Gatito das Botas said...

excelent explanation.
Thank You

Anonymous said...

Perhaps there is some basis risk and perhaps there was slight contango, but really no big deal w/ a stack and roll since relative movements in markets should take care of themselves over time.

The accounting issue is a bigger one as it creates short-term stress.

Perhaps the biggest issue is that everyone knew their position and that they needed to roll. The fact that they needed such large positions to stack hedges meant that their size was huge relative to natural participants in the market and speculators were all ready to step in front of roll trades they knew needed to trade.