Maturity Structure of a Hedge Matters: Lessons from the Metallgesellschaft Debacle

Posted: 6 Sep 1999

See all articles by Antonio S. Mello

Antonio S. Mello

University of Wisconsin - Madison - Department of Finance, Investment and Banking

John E. Parsons

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: February 1995

Abstract

At the start of 1994 Metallgesellschaft AG, the 14th largest corporation in Germany, stood on the brink of bankruptcy as a result of more than $1 billion in losses from trading in oil futures. The futures trades were ostensibly a hedge for the firm's oil delivery contracts. How could a set of transactions which purportedly locked-in profits, making the firm safer, in fact lead the firm to bankruptcy? A critical problem was the mismatch in maturities between the company's delivery contract exposure to oil price risk and the company's portfolio of futures. Although the contract exposure was to long-term oil prices, it hedged with short- dated futures in order to capture profits from perceived mispricings in that market. When that gamble did not pay off, it undermined the entire company. Understanding the mistakes made by Metallgesellschaft is critical if other firms are to avoid a similar fate without forsaking the significant benefits available from a correctly planned hedging strategy.

JEL Classification: G13, G31, G32, G33

Suggested Citation

Mello, Antonio S. and Parsons, John E., Maturity Structure of a Hedge Matters: Lessons from the Metallgesellschaft Debacle (February 1995 ). Available at SSRN: https://ssrn.com/abstract=6104

Antonio S. Mello

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-3423 (Phone)
608-265-4195 (Fax)

John E. Parsons (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~jparsons/

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