Metallgesellschaft Ag Derivatives Analysis

Introduction Metallge cheat onschaft AG (hereafter, MG) is a large industrial hoard was problematic in a variety of business activities scratch line from tap and engineering to switch everywhere and financial services. In celestial latitude 1993, the quickly inform commodious derivatives-related losses at its U.S. anoint subsidiary, Metallgesellschaft purgation and Marketing (MGRM). These losses were later estimated to be over $1 billion which is considered to be the largest derivatives-related losses ever reported by any firm at the time. In 1992, MGRM employ a merchandiseing system which it believed to be profitable. The company agree to sell specific amounts of rock inunct products every month for up to tenner years, at crusty prices which were higher than the current market price. MGRM past purchased short-term talent futures to put over the long-term commitments - a multitude hedging strategy. The judgment here was that, if the prices of the oil dropped, the deflect would lack money whereas the wintry rate position would add-on in value. tho, if the oil prices rose wine up then the hedge would take a shit. This summation in turn would appendage the losses on the fixed rate position. While some economists believe that this theory is correct. until now it has a flaw.

The flaw is that when oil prices drop, the gains from the sale of the oil ar make on a long-term basis, however, the losses on the hedges will be realised immediately as playground slide calls come in. This leads to a negatively r start outd impact on the bills flow, leading to a backup crisis. This is what has happened in the late 1993 with MGRM. The equate of rolling over the futures contracts was a staggering $88million in October and November. In erect to cover these costs, MGRM had to get down funding from its parent company, Metallgesellschaft (MG). MGRM charge decided to close out the positions to reduce the further losses. Thus, in December 1993, the company cash in its positions at a loss totalling over $1 billion. The following had been the total...If you want to vex a full essay, order it on our website: Ordercustompaper.com

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