Major HBR cases concerns on a whole industry, a whole organization or some part of organization; profitable or non-profitable organizations.
MG was a huge, German industrial conglomerate that decided to open an energy trading office in the US in the early 90s. The original plan was threefold: Sell refined products in the forward, physical market. Invest in refining capacity to produce the products. Hedge the forward sales through financial derivatives.
When the strategy was first implemented incurrent physical prices were lower than the futures prices. So the sales contracts were set at those higher future prices. And it meant that purchasing the "near" month futures contracts would be profitable.
So MG developed a strategy whereby they would cover the long-term, fixed-price sales by buying contracts in these few, near months. As each month "rolled-off," they would merely buy contracts in the next month.
It was their intent to continue this process until the physical product sales contracts expired in 10 years. This strategy worked as long as the futures market was "backwardated," whereby each successive month is lower than the prior one Lesson 3.
One of the major flaws in this approach, however, was the volume of contracts being traded since they were "loading-up" on closer month contracts.
Add to that the fact that they would not get paid for the product sales for years out, and you begin to have a cash flow problem Metallgesellschaft case study margin calls are concerned.
Their position in the Fall of was estimated to be between to million barrels stretched-out over the following 10 years. Inprices fell as the market received a "bearish" signal from OPEC on production quotas.
Faced with this position, MG management was changed and the new team was directed to close all positions. The had to seek bailout funds from one of their banks, and in return, had to sell-off several divisions. Today, the German industrial giant no longer exists having been bought-out by a competitor.
Please watch the following video 6: Metallgesellschaft case on hedging disasters Click here for the transcript.
This David Harper at Bionic Turtle with a very brief overview, just selected highlights for one of the key case studies for the FRM candidate.
This concerns the German company that goes by this name Metallgesellschaft that I will abbreviate to MG so as to not mispronounce the proper German name for the company.
And the case is about the very public disaster experienced by the company in the early s. It starts with the initial positions in which MG offered fixed-price, long-term contracts to deliver or supply heating oil and gasoline to its customers, independent wholesalers, and retailers.
So these initial positions were short positions in long-term forward contracts with maturities of 5 to 10 years.
How did the company hedge its exposure? It did this with what is called or by employing a stack and roll strategy, or a stack and roll hedge. And so in this hypothetical example, each barrel might represent 10, barrels of oil.
Background of the case This German conglomerate is owned largely by some very big banks in Germany like Deutsche Bank, Dresdner Bank to name a few as well. Oct 11, · Hello David, I think I'm getting really confused about the different positions (long/short) in futures and forward contracts associated with the Metallgesellschaft's case. Background of the case This German conglomerate is owned largely by some very big banks in Germany like Deutsche Bank, Dresdner Bank to name a few as well.
So that is to purchasebarrels of oil. And right before expiration on those long positions in futures contracts, MG, the company, closes those out and enters into a new stack, a new set of short-term futures contracts where it takes a long position.
And so in this way, the company could go, say, month-to-month with this stack and roll. That is to say, buy it, go long a short-term stack, close that out, enter into another short-term stack, and keep doing that month-to-month.
And so you can see the short position in these long-term forwards is hedged to a degree but not perfectly by these long positions in short-term futures. So notice that if oil prices or oil spot prices are increasing gently, then these short positions are losing money on the forwards.
However, they are hedged by the profits that are made on the long positions in these futures contracts. And so generally, the strategy had relied on the continuation of backwardation in the market place-- that is to say where the forward price is lower than the spot price or where long-term forward prices are less than near-term forward prices.
As long as backwardation persisted, this hedge is generally effective. However, the market shifted to contango. Contango is when the forward price is greater than the spot price or the long-term forward is greater than the near-term forward. Because what happens if we focus here at the start of the curve-- this is the spot price.
The spot price here is dropping rapidly relative to the forward price.Metallgesellschaft AG Harvard Case Study Solution and Analysis of Case Study Solution & AnalysisIn most courses studied at Harvard Business schools, students are provided with a case study. Major HBR cases concerns on. Metallgesellschaft AG is a commodity and engineering conglomerate in Frankfurt am Main, Germany.
Metallgesellschaft Corp, New York subsidiary of the group, made the oil trading and hedging errors that can lead a group in insolvency. Nov 10, · In MG, the underlyings were short positions in long-term forward contracts to deliver oil. The hedge was a stack-and-roll hedge: long positions in short-term.
Metallgesellschaft AG: A Case Study. Page 1 of 7 Metallgesellschaft AG: A Case Study By John Digenan, Dan Felson, Robert Kelly and Ann Wiemert In December, , Metallgescellschaft AG revealed publicly that its "Energy Group" was responsible for losses of approximately $ billion, due mainly to cash-flow problems resulting from large oil forward contracts it had written.
Background of the case This German conglomerate is owned largely by some very big banks in Germany like Deutsche Bank, Dresdner Bank to name a few as well.
Metallgesellschaft AG: A Case Study In December, , Metallgescellschaft AG revealed publicly that its "Energy Group" was responsible for losses of approximately $ billion, due mainly to cash-flow problems resulting from large oil.