Metallgesellschaft (MG) took 1.8 billion dollars in losses not because their underlying positions and rationale were unsound, but because they were unable to roll over their stack hedge positions in the way that they anticipated and because they underestimated the amount of cash needed to fund their positions. The basic strategy employed by MG, or more specifically, Arthur Benson, who crafted MG’s derivatives strategy, was to sell contracts on petroleum and to hedge this exposure with a stack hedge. He had successfully implemented this strategy just a few years earlier at another firm. This stack hedge was then rolled forward upon expiration. MG sold forward contracts to its customers, selling them a fixed amount of gasoline at a fixed …show more content…
The futures contracts, if the value fluctuated enough, would result in margin calls for MG during which they would have to contribute additional capital in order to cover their losses on their futures positions. In theory, as a result of their hedging strategy, these losses on their futures positions would be offset by their gains on the forward positions with their customers. The problem arose because the gains on the forward contracts were realized over the long term and the increased cash requirements associated with the futures contracts occurred immediately. Futures contracts are settled daily and forward contracts are settled upon delivery. One of the reasons why the losses on these futures contracts put MG into financial hardship was because of this cash flow timing …show more content…
Rather than riding out the short-term losses, which weren’t really losses, but rather negative cash flows, MG’s management panicked. In early 1994, a group of German banks issued a bailout of about $1.9 billion in order to save MG. MG used the money to close its hedge positions. The obligations to MG’s customers remained, completely unhedged after the bailout. In effect, MG’s management made a critical mistake. They saw the hedging activities as the problem and misunderstood the nature of their losses. In total, MG lost about $1.8 billion. Unfortunately for MG, if they had held onto the derivative positions, they could have seen huge gains in 1994 as oil prices soared. The firm did not go bankrupt, but did leave the US oil markets completely in 1996. Ultimately, Arthur Benson, the trader constructed MG’s hedging strategy, was fired, even though the board approved his strategy. He later sued MG for failing to implement his strategy properly and attempting to blame him for their actions. Five members of the MG board were fired and 7,500 jobs were cut to reduce costs, but in the end MG survived and was able to return the bailout money within a couple of
In 1985, after federal deregulation of natural gas pipelines, Enron was born from the merger of Houston Natural Gas and InterNorth, a Nebraska pipeline company. In the process of the merger, Enron incurred a lot of debt and, as the result of deregulation, no longer had exclusive rights to its pipelines. In order to survive, the company had to come up with a new and innovative business strategy to generate profits and cash flow. Kenneth Lay, CEO, hired McKinsey & Co. to assist in developing Enron’s business strategy. It assigned Jeffrey Skilling to the task. Skilling, who had a background in banking and asset and liability management, proposed a revolutionary solution to Enron’s credit, cash, and profit worries in the gas pipeline business: create a “gas bank” in which Enron would buy gas from a network of suppliers and sell it to a network of consumers, contractually guaranteeing both the supply and the price, charging fees for the transactions and assuming the associated risks. Thanks to the young consultant, the company created both a new product and a new paradigm for the industry—the energy derivative. Lay was so impressed with Skilling’s ...
In this analysis includes a summary of the characters and the issues they are dealing with, as well as concepts that are seen that we have discussed in class. Such as stereotyping and the lack of discrimination and prejudice, then finally I suggest a few actions that can be taken to help solve the issues at hand, allowing the involved parties to explain their positions and give them a few immersion opportunities to experience their individual cultures.
...isky for GE to lose their investments. In Welch’s period, it was less risky to lose investment as he really concerned about shareholders. Later, Jack admitted that shareholder value idea is insane and GE should more concerned about management and employees back then. He revealed that doing business in 1990s was different with current business conditions.
Many people today would consider the 2008, United States financial crisis a simple “malfunction” or “mistake”, but it was nothing close to that. Contrary to what many believe, renowned economists and financial advisors regarded the financial crisis of 2007 and 2008 to be the most devastating crisis since the Great Depression of the 1930’s. To make matters worse, the decline in the economy expanded nationwide, resulting in the recession of 2007 to 2009 (Brue). David Einhorn, CEO of GreenHorn Capital, even goes as far as to say "What strikes me the most about the recent credit market crisis is how fast the world is trying to go back to business as usual. In my view, the crisis wasn't an accident. We didn't get unlucky. The crisis came because there have been a lot of bad practices and a lot of bad ideas". The 2007 financial crisis was composed of the fall of many major financial institutions, an unknown increase in mortgage loan defaults, and the derived freezing up of credit availability (Brue). It was the result from risky mortgage loans and falling estate values (Brue) . Additionally, the financial crisis of 2007 was the result of underestimation of risk by faulty insurance securities made to protect holders of mortgage-back securities from risk of default and holders of mortgage-backed securities (Brue). Even to present day, America stills suffers from the aftermaths of the financial crisis.
Not only were millions of Americans been put out of work due to these manager’s actions, the American financial markets themselves were pushed to the brink of collapse. Despite the fact that the global financial markets, in reality, are not perfectly efficient, there is a corrective mechanism built into the day-to-day trading in the market. When prices are driven down by large sells, either by large investors or a movement in a stock, there are usually new buyers for these stocks at the cheaper price. Managers of...
Investors purchased stock on margin. For every dollar invested, a margin user would borrow 9 dollars worth of stock. Because of this leverage, if a stock went up 1%, the investor would make 10%! This also works the other way around, exaggerating even minor losses.
It has been said that every good thing must arrive at an end. On account of the Roaring Twenties that end came suddenly and startlingly. It is simple for one to think back upon the monetary circumstance that prompt the accident and disparagement the specialists for not seeing the indications of a potential calamity. Be that as it may, it was not all that simple for them to see such an accident coming. The 1920 's were a blasting decade and stock costs appeared to be at an unfaltering move for an apparently interminable ascent. Numerous elements can be ascribed to the reason for the accident however nobody element can be singled out as the lone reason. The real reasons for the share trading system accident of 1929
...ade it impossible for railroads to borrow money. Railroads were highly leveraged and required loans to repay current debt obligations. When the financier of the Northern Pacific Railroad, Jay Cooke and Company, could not borrow more money, its investment house closed its doors and caused a panic on Wall Street. Nervous investors tried to withdraw their funds from investment houses and banks. Wall Street closed for ten days.
The United States located electronic company Electrocorp faced the problem of declining profitability due to rising production costs, specifically high wages, costly worker's safety and environmental standards. In order to solve this problem Electrocorp is deciding whether to relocate some of their plants to South Africa, Mexico, or the Philippines.
The Political, Social, and Legal Environment of Business. Case Study Analysis: Union Carbide Corporation and Bhopal. A single slip in action may cause lasting sorrow. A slight mistake in operation at a Union Carbide pesticide plant in Bhopal, India, caused a lot of deaths and injuries. What a tragedy it is.
5.7. Name the four alloying elements that have the greatest effect on the properties of steels.
In conclusion, hedging risk with financial derivatives can give firm range of benefits such as lower probability of having financial distress, lower value of debt ratio, and earn tax benefit. It can be concluded that firm should hedge risk using financial derivatives because lot evidence shows that firm using this strategy is more successful than those who are not. However, since different type of companies facing different risks, they should not necessarily use the same hedging strategy.
Many of the “Elite” financial figures could not give a definite answer about why this crisis occurred as well as stated by many of the people interviewed, “We don’t know how it happened.” Many young brokers working for JP Morgan back in the middle of the 90’s believed they could come up with a way to cut risk, credit derivatives. Credit Derivatives are just a way of using other methods to separate and transfer risk to someone else other than the vender and free up capital. They tested their experiment with Exxon Mobile who were facing millions of dollars in damage for the Valdez Oil Spill back in 1989 by extending their line of credit. This also gave birth to credit default swaps (CDS) which a company wants to borrow money from someone who will buy their bond and pay the buyer back with interest over time. Once the JP Morgan and Exxon Mobile credit default swap happened, others followed in their path and the CDS began booming throughout the 90’s. The issue was that many banks in...
Siemens is a German conglomerate that specialise in electronics and electrical engineering. They currently operate in four different sectors, these being Healthcare, Industry, energy and Infrastructure & Cities sector (Siemans a). They are represented in 190 countries (Siemens b), employ around 362,000 employees (Siemens c) and in 2013 achieved a revenue of €75,882 million and a net income of €4,409 million (Siemens d). This essay will focus on Siemen’s energy sector.
...ting in hedging activities in the financial futures market companies are able to reduce the future risk of rising interest rates. By participating in the financial futures market companies are able to trade financial instruments now for a future date (Block & Hirt, 2005).