Metallgesellschaft (MG)
MG had an oil trading arm that blew up taking down with it the whole firm. There are many resources for you to obtain information about what happened simply by googling it, cases about its demise and so forth.
Please read over the multiple pieces explaining (many from different perspectives) the failure of MG.
1. Discuss carefully what the oil arm’s business plan was in the States and how they were to carry it out.
2. Under what conditions did this plan make sense? Examine the futures hedges for the long-term contracts being offered.
3. Define the embedded options risk in their contracts and how this would relate to their hedging strategy.
4. Discuss accounting issues related to Mark to Market and non- mark to market.
5. Explain how the futures exchanges operate differently than the long term contracts that MG were using with their clients. Show how this impacted cash flow.
6. Explain the differences in economic risk and the hedging versus cash flow (liquidity risk).
7. Explain US accounting versus German accounting standards and the implications for economic risk if any.
8. Tell us what happened and why from answering the 7 questions abovel
9. Would Value at Risk analysis helped save them?
10. How would you have valued the non-linear risks in the contracts vis a vis the hedges that were being used?
11. Did this introduce gamma risk? Vega risk?