Study On The Financial Strategies Used By Metallgesellschaft Finance Essay

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Metallgesellschaft MG is the 14th largest industrial company in the Germany. It has started working in December 1991. Its executive chairman was Heinz Schimmelbusch.

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About 58000 employees were working in this company. It was a large company, involved in a wide range of activities, like mining, engineering, commodity market and financial services. Major shareholders in this company were Deutsche Bank AG, the Dresdner Bank AG, Daimler-Benz, Allianz, and the Kuwait Investment Authority MG, a traditional metal company. Its customers were mainly retail gasoline suppliers, manufacturing firms and government agencies. MGRM expand its business by transforming into the derivative world in 1991. They hire a special person for this work whose name was Mr. Arthur Benson from Louis Dreyfus Energy. It was Benson’s strategy that eventually contributed to the massive cash flow crisis that MG experienced.

MGRM dealings

MGRM promised to his customers that he will provide certain amount of petroleum at a fixed price every month. This contract starts from 1992 and was valid up to 10 years. At first this contract was going well because oil prices were moving upward than the committed price. The profit margin was even raised up to $5 per barrel. Approximately 160 million barrels were supplied by MGRM by September 1993. This mechanism was about to raise the oil prices.

Hedging strategy by MGRM

MGRM hedged its spot price risk exposure by using exchange traded future contracts via “stack and roll” hedging strategy. In this strategy, the firm takes long position in future contract to cover its entire risk exposure. In the “stack” part, MGRM placed the entire hedge in short dated delivery months. He managed to use front-end month futures contracts on the NYMEX. MGRM’s strategy was sound from an economic standpoint. At the end of each month, the company closes out its position, and opens new long positions to cover its remaining exposure. (This is the “roll “part.). MGRM had a large amount of Texas Intermediate sweet crude contracts. In the “roll” part, MGRM made long future contracts and entered into OTC energy swap agreements to receive floating and pay fixed energy prices. NYMEX reported that during this time, MGRM hold about 55 million barrels of gasoline and heating oil.

What can stack and roll strategy do?

Theoretically, a stack-and-roll strategy should provide a good hedge for an exposure like MGRM’s. If oil prices rise, there would be a loss on the forward contracts, but a gain on the long futures positions. If oil prices fall, there would be losses on the long futures positions, but these would be offset by the increased economic value of the forward commitments.

Loss occurrence

The company was running well,

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