The Collapse of Metallgesellschaft (MG): Hedging or Speculation

Abstract

In 1993 Metallgesellschaft nearly collapsed after a series of hedging transaction that lead the company into a severe liquidity crisis. Only a big rescue operation by a banking consortium to provide liquidity allowed Metallgesellschaft to continue operation. This paper is analyzing certain aspects of this near collapse such as the basic principle of the hedge strategy applied, it’s short and long term potential consequences as well as the risks associated with taking on such large positions. The paper tackles the hedge from different perspectives. The quantitative analysis simulates the risks that MGRM has been taken on while the qualitative analysis looks at aspects such as the timing of the hedging, the comparatively large position with regards to the total market in oil futures as well as the basic risks taken by MGRM. The paper also takes a closer look at the different analysis provided by financial experts that is divided into two camps; the one arguing that the hedge would have been ultimately effective while the other camp supporting the opinion that those big hedge positions are ultimately being seen as a speculation. In contrast to the analysis done by Henke, Culp and Miller who neglected the interest rate this paper shows how interest rate plays a major role in the full effect of the hedge strategy being entered. Finally the role of the management is being analyzed as having the most detrimental effect on the final outcome of the situation and the fact that MG nearly collapsed due to the decision the new management took at that time.