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MATURITY STRUCTURE OF A HEDGE MATTERS: LESSONS FROM THE METALLGESELLSCHAFT DEBACLE
Author(s) -
Mello Antonio S.,
Parsons John E.
Publication year - 1995
Publication title -
journal of applied corporate finance
Language(s) - English
Resource type - Journals
eISSN - 1745-6622
pISSN - 1078-1196
DOI - 10.1111/j.1745-6622.1995.tb00279.x
Subject(s) - citation , library science , maturity (psychological) , management , sociology , political science , economics , law , computer science
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.