Metallgesellschaft and the Economics of Synthetic Storage

Culp, Christopher L.; Miller, Merton H.

doi:10.1111/j.1745-6622.1995.tb00263.x

Cited by 96 publications

(26 citation statements)

References 2 publications

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“…Second, gold mining firms tend to match the maturities of the hedge contracts with the planned gold production. These differences 10 See Culp and Miller (1995) and Mello and Parsons (1995) for details about the Metallgesellschaft case. We thank the referee for drawing our attention to this episode.…”

Section: Existing Evidence On Selective Hedgingmentioning

confidence: 99%

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Hedging, Speculation and Shareholder Value

Adam

2003

SSRN Journal

139

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HKUST Finance Symposium, and two anonymous reviewers of the Hong Kong Research Grants Council for their comments and suggestions. We are especially grateful to an anonymous JFE referee for helping to substantially improve the paper. We are also grateful to Ted Reeve for providing us with his derivative surveys of gold mining firms. The Research Grants Council of Hong Kong provided financial support for this project, and Harry Kam Ming Leung provided excellent research assistance. We are responsible for any remaining errors.

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Section: Existing Evidence On Selective Hedgingmentioning

confidence: 99%

“…22 See Culp and Miller (1995) for a discussion of the economics of MG's synthetic storage program. 23 While MG also ended up being exposed to the risk of a reversal in the basis, this was due to the mismatch in maturities arising from their "stack and roll" strategy.…”

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confidence: 99%

Hedging, Speculation and Shareholder Value

Adam

2003

SSRN Journal

139

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“…The firm could in principle also raise outside funds but, because of various frictions in the capital market, that might not always be possible either. Plus, the losses on the derivatives leg might be mistaken for unhedged losses and cause inappropriate policy decisions [see the Metallgesellschaft case as described in Culp and Miller (1995)]. …”

Section: 7mentioning

confidence: 99%

Firms, do you know your currency risk exposure? Survey results

Loderer¹,

Pichler

2000

Journal of Empirical Finance

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This paper draws on Vontobel (1996). We would like to thank the participants of the LIFE and Journal of Empirical Finance conference on Risk Management in Portugal and the discussant Willem Verschoor. We are also indebted to the seminar participants at the Stockholm School of Economics and at the 7 th Finance Workshop of the Studiengruppe für Finanzmarktforschung. We further benefited from the comments of Manuel Ammann, Didier Cossin, John McConnell, Urs Peyer, Dennis Sheehan, Heinz Zimmermann, and, especially, René Stulz. We are also grateful to Petra Jörg and Pius Zgraggen for their generous help, and to Stefan Reusser for computational assistance.page 2 Firms, do you know your currency risk exposure?Survey results AbstractThis paper surveys the currency risk management practices of Swiss industrial corporations. We find that industrials do not quantify their currency risk exposure and investigate possible reasons. One possibility is that firms do not think they need to know because they use on-balance-sheet instruments to protect themselves before and after currency rates reach troublesome levels. This is puzzling because a rough estimate of at least cash flow exposure is not a prohibitive task and could be helpful. It is also puzzling that firms use currency derivatives to hedge/insure individual short-term transactions, without apparently trying to estimate aggregate transaction exposure.page 3 Firms, do you know your currency risk exposure? Survey resultsThis paper surveys the currency risk management practices of Swiss industrial corporations. Many of them sell most of their output abroad and would therefore seem to be heavily exposed to currency risk.In fact, currency risk can be substantial. Between 1978 and Swiss franc experienced dramatic swings in relation to major currencies such as the U.S. dollar, the Italian lira, and the British pound. Comparing highest and lowest exchange-rate levels, the U.S. dollar depreciated by 60% vis-à-vis the Swiss franc, the Italian lira by 70%, and the British pound by 62%. Moreover, although not as high as those observed in the equity markets, annual currency rate volatilities can be sizable-in the past six years or so, the volatility of the U.S. dollar, for example, has exceeded 12%. The purpose of this study is to examine whether industrials quantify their risk profile.Risk management can benefit shareholders because of various concavities in the risk profile of firm value [Stulz (1984), Smith and Stulz (1985), Froot, Scharfstein, and Stein (1993), ]. Such a risk profile (RP) maps firm value against unexpected changes in a specific output price or factor cost. RP concavities are brought about by, among other things, direct costs of financial default, transaction costs of outside funding, asymmetries of information between managers and investors, moral hazard, "firm-specific investments" of noninvestor groups such as managers, employees, customers, and suppliers, and convex tax schedules.Accordingly, unfavorable states of the world reduce firm value by more than favo...

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“…In these circumstances, substantial losses are quite likely to result. This is essentially what ended Metallgesellschaft's venture into the U.S. oil market (Culp and Miller 1995). Finally, unhedged price risk is not the result of hedging but results if the hedge is inadequate.…”

Section: Financial Risk To Ratepayersmentioning

confidence: 99%

“…The root of MG's demise is still being debated, but it was either a result of: (1) a hedging strategy with a high chance of succeeding happened to experience extremely uncommon market conditions, or (2) poorly informed managers liquidated a perfectly good long term hedge due to temporary losses (Culp and Miller 1995;Edwards and Canter 1995). Most likely, it was a combination of the two factors.…”

Section: Potential Dangers Of Derivativesmentioning

confidence: 99%