Metallgesellschaft and the Economics of Synthetic Storage

Abstract

Der nachstehende Aufsatz wird mit freundlicher Genehmigung des Journal of Applied Corporate Finance zeitgleich deutschen Lesern zugänglich gemacht. Bereits vor seiner Veröffentlichung hat dieser wissenschaftliche Beitrag zu einem aktuellen Thema eine lebhafte internationale Diskussion in den Medien ausgelöst. Er muß als Lehrstück zum sachgerechten Einsatz von Termingeschäften angesehen werden und enthält zugleich eine Interpretation der Vorgänge in der Metallgesellschaft

Hedging grain price risk in the SADC: Case studies of Malawi and Zambia

“…The futures-augmented import strategy is sometimes called ''synthetic storage'' -see Culp and Miller (1995). This term reflects the fact that, in taking a long futures position, the agent is requiring the market to undertake storage on its behalf, the incentive provided by a rise in the futures price relative to the cash price.…”

28. Price Protection Strategies for an Oil Company

“…Prior to a discussion of this fully integrated strategy we focus on MGRM's financial activities and on one aspect of its derivatives strategy termed "synthetic storage'' [1,4,5,9]. The term synthetic storage means that the company holds oil derivatives rather than physically storing oil.…”

“…The hedging portfolio consisted of short-dated energy futures-1-month or 2-month futures contracts with underlying products being WTI crude oil, heating oil, and gasoline, traded on the NYMEX-and 3-month OTC swaps (receiving finished product and paying crude), in the proportions 33 1 3 % and 66 2 3 %, respectively. Given their long-term forward supply commitments and their hedging portfolio of short-term derivatives, MGRM followed a stack and roll or synthetic storage strategy.…”

“…The objective and constraints corresponding to MGRM's hedging strategy [1] are given below. We assume that f d,t is the random price of derivative d per unit of underlying product when it is purchased by MGRM in period t. (Throughout the paper random variables are denoted by boldface type.)…”

“…Here we integrate such financial planning with logistics planning and illustrate the importance of this integration with the example of the Metallgesellschaft financial collapse. This spectacular loss of nearly $1.3 billion is usually presented as a derivatives failure and is studied by risk managers [1,4,5,10]. It is still debatable whether it was "unhedgeable risks, poor hedging strategy, or just bad luck'' [5] or was it simply speculation on the derivative markets?…”