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A CASE STUDY
BY:
SHEETAL SENGHANI 47
SWAPNIL TIWARI
Company profile
Metallgesellschaft AG
14 largest company in Germany
Conglomerate with interest in metal, mining and
engineering business and other 15 subsidiaries
Metallgesellschaft corporation, the U.S. subsidiaries
Trading in U.S. government bond, foreign currency,
emerging market instruments and various
commodities
MG Refining and Marketing
U.S. oil trading subsidiaries
New entrance to us market, low market share
Goal to develop a fully integrated oil businessin U.S
If the buyer exercised this option, then MGRM had to pay in cash onehalf of the difference between the futures price and the fixed prices
multiplied by the total volume remaining to be delivered on the
contract.
Conclusion
These types of losses are the result of a poor understanding of
the market.
Thus, it is imperative for CFOs and decisionmakers to understand the nature of their position in the market,
and the consequences of market movements on the financial
position of the company. There is a need to evaluate the market
environment before taking any positions.
MGRM was initially successful in hedging its market risk,
especially when oil prices were rising. However, it failed in
assessing the funding risk of its hedge position. If the prices had
continued to rise, it would have been smooth sailing for MGRM.
F Given the contango market, MGRM should have forecasted
the downtrend in prices and suitably adjusted the contract price
to avoid losses.
Recommendation
1. Match the duration of the two contracts in
your hedging strategy
here the company was using 1-month contracts
to hedge a longer term risk
2. have appropriate controls in place so that if
your hedging strategy goes wrong, you can still
take corrective action in time and limit your
losses.
3. If you are in deep shit, communicate the same
properly and timeously to your shareholders so
that they are aware of the issue