Mg Refining & Marketing, Inc. (A)

4 Pages Posted: 30 May 2017

See all articles by Robert M. Conroy

Robert M. Conroy

University of Virginia - Darden School of Business


This case presents the situation that resulted in the disastrous derivative losses Metallgesellschaft experienced. It presents the basic strategy that MGRM implemented and describes how MGRM decided to hedge the risks. One nice feature about this situation is that the marketing strategy created a risk that needed to be hedged. This provides a good framework to discuss how marketing or production decisions create risks that can be hedged in financial markets. The key is that business decisions create the risks, not financial decisions. In this context, students can assess the risks created by the marketing strategy and then evaluate how effective the hedging strategy was in dealing with those risks.



Rev. Nov. 15, 2010


In 1993, Metallgesellschaft A. G. was the 14th largest corporation in Germany: a large conglomerate with more than 251 subsidiaries representing interests in metals, mining, and engineering. Sales in 1992 were over (German deutschemarks) DEM26 billion ([U.S. dollars] USD$ 16 billion), and assets totaled about DEM17.8 billion (USD10 billion). Only about 35% of Metallgesellschaft shares were freely traded. The remaining 65% were held by seven institutional investors: the Emir of Kuwait, Dresden Bank, Deutsche Bank, Allianz, Daimler-Benz, the Australian Mutual Provident Society, and MIM Holdings Ltd. of Australia.

Metallgesellschaft's U.S. oil trading subsidiary was MG Refining & Marketing, Inc., (MGRM). In 1989, as part of a plan to develop an integrated oil business in the United States, MGRM acquired a 49% interest in Castle Energy. Castle was a U.S. oil exploration firm, which, with MGRM's help, developed an oil refinery capacity. The refinery capacity was centered on two refineries: a 77,000-barrel-per-day plant in Lawrenceville, Illinois, and a 49,500-barrel-per-day refinery in Santa Fe Springs, California. In addition to the equity position, MGRM had long-term agreements (about 10 years) with Castle to buy and market all the refined products from these two refineries. These takeoff agreements provided guaranteed margins for Castle over prevailing market prices. For MGRM, they guaranteed a supply of refined products, but the prices they paid were still subject to market conditions, since they paid Castle the market price plus some margin.

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Keywords: futures, hedging, derivatives

Suggested Citation

Conroy, Robert M., Mg Refining & Marketing, Inc. (A). Darden Case No. UVA-F-1227, Available at SSRN: or

Robert M. Conroy (Contact Author)

University of Virginia - Darden School of Business

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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