Metallgesellschaft
Overall Strategy
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MGRM (MG refining and marketing) is
US subsidiary of MG.
Strategy: fully integrate oil business in
the US and develop long term customer
relationships.
Approach: Use forward delivery
contracts (160 million barrels over ten
years). Acquired Castle energy in 1989.
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Forward Delivery Contract
Gain for
Client
Gain for
MG
PFIX
Spot
price
Time
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Conditions for terminating contract
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NYMEX futures price > fixed price
MG pays 50% of price difference
NYMEX futures price > exit price
In both cases, situation where the client
is in the money.
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Terminate
Contract
Futures
PFIX
2002
1992
Time
10 years
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Hedging forward delivery contract
positions
Gain/Loss
Long futures
PFIX
Spot
price
MG position
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Hedge with Futures
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Regular unleaded gasoline
NY harbor no. 2 heavy oil
West Texas Intermediate Grade Light
Sweet Crude Oil on NYMEX
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Futures hedge
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Short-dated futures
Use roll-over hedge
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Why short dated futures?
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Cost relative to physical storage?
Liquidity relative to long dated market?
Short dated, however, requires roll-over
strategy in this scenario.
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Price
Backwardation: spot (nearby futures price)
greater than deferred futures price)
For example, it is the end of November
Rolling Over
Hedge
Sell
Buy
Maturity
Spot Near
(Dec.)
Deferred
(March)
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price
92
6/93
9/93
12/93
maturity
backwardation
92
contango
6/93
9/93
$19/barrel spot
backwardation
12/93
$15/barrel spot
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10/94
11
Losses Hedging Scheme
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Total 1.3 billion dollars
Loss of 20-30 million dollars/month on
the roll over hedge due to contango
curve
Main lenders: 1.9-2.1 billion dollar
rescue plan
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Was the Hedging Scheme
Flawed?
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Let us assume the delivery contracts were a
good marketing strategy.
Hedge Ratio: one to one vs optimal
(minimum variance, max. expected utility).
Tailing the hedge.
Large positions on the NYMEX
Backwardation vs Contango: contango is
unusual but not without precedent. Prepared
for worst case scenario? Value at risk
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MG Supervisory Board:
1) liquidated derivative position
2) liquidated forward contract
positions.
Right Decision?
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