Metallgesellschaft, 1993

The right hedge, on the wrong clock

A German industrial group’s US oil subsidiary sold customers fixed-price supply contracts running up to ten years, and hedged them by holding short-dated futures rolled forward month after month. The economics offset almost exactly. The cash flows did not: the futures settled daily in cash while the customer contracts settled over a decade. When oil fell in 1993 the hedge haemorrhaged margin, the roll turned from a source of income into a cost, and the parent liquidated at the bottom for around $1.3bn.

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What the lesson covers

1. What happened
2. The stack and roll
3. Why it broke
4. What it cost
5. What it teaches

Key terms

• Stack and roll — Holding the whole hedge in nearby contracts and rolling it forward, because distant months are not liquid enough.
• Backwardation — A curve where nearby prices exceed distant ones, which makes rolling a long position cost money.
• Contango — The opposite shape, where distant prices exceed nearby ones, and a long roll earns rather than costs.
• Maturity mismatch — A hedge whose settlement dates differ from the exposure’s, leaving a funding gap even when the economics offset.
• Roll yield — The gain or loss from replacing an expiring contract with a later one, which accumulates every month.
• Liquidation decision — The choice to close a hedge, which converts an unrealised offset into a realised loss.

In practice

Long-dated physical supply is still hedged with shorter instruments, because the liquidity is where it is. What changed is that the roll and the funding are modelled explicitly, financed in advance, and governed by people who know that unwinding the hedge is itself a position.

Read next

• Commodity Swap — Fixed price for floating market price
• Commodity Forward — Agree a price today for delivery later
• The gilt LDI crisis, 2022 — Pension hedges that worked, and could not be funded

In the app, Metallgesellschaft, 1993 carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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