The Best Essay

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MSc: in Global Finance Fixed income Securities & Derivatives’ Homework #1 Case #2 The Best Team: 1. Describe the steps that brought Metallgesellschaft to the loss of $1.3 milliard. 2. Why Metallgesellschaft needed to hedge in the oil market in the first place? 3. What would be the “ideal” hedging strategy and what was the one implemented by MG? 4. Explain the term “rolling hedge”. 5. What’s a “margin call”? Metallgesellschaft: The background 1. Actually, Metallgesellschaft, the name is quite a mouthful to say, was a German corporation. ‘Cause it is part of Top 10 Biggest Trading Losses in History. They were a conglomerate with interests ranging from metals, shipping to mining. They also had a financial trading arm, Metallgesellschaft Corporation, a subsidiary based in the US. Another piece of the empire was MG Refining and Mining and this company was involved in oil trading activities. German metalworking conglomerate Metallgesellschaft AG gambled hard and fell even harder. In 1993 the company lost $1.3 billion after speculating that oil prices would rise. Oil plummeted, however, forcing shareholders to hastily put together a $2 billion rescue package to keep the company from going under bankruptcy. CEO Heinz C. Schimmelbusch, widely respected as a financial wunderkind, was quickly ousted along with most of Metallgesellschaft’s senior management. The company sued Schimmelbusch in the U.S. and Germany, accusing him of breach of duty in the trading losses. The ex-CEO filed a $10 million countersuit in New York Supreme Court against the current management and Deutsche Bank, Germany’s biggest financial institution, claiming the bank used the company’s misfortunes to profit financially and brought it to the brink of bankruptcy. (The two sides eventually settled.) Metallgesellschaft Refining obtained a 49% stake in a company called Castle Energy in the US. This was the

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