“Metallgesellschaft”
Metallgesellschaft AG was formerly one of Germany’s largest industrial conglomerates, based in
Frankfurt. It had over 20,000 employees and revenues in excess of 10 billion US dollars. It had
over 250 subsidiaries specializing in mining, specialty chemicals (Chemetall), commodity
trading, financial services, and engineering (Lurgi). In 1993, the company lost 1.3 billion dollars
after speculating on increases in oil prices in the oil futures market. A subsequent drop in oil
prices left the company buying the oil at a higher price than the market price.
Answer the following specific questions related to the case in your presentation:
1. How does the theory of Interest Rate Parity compare with the “cost-of-carry” valuation
formula?
2. Why should futures commodity markets be expected to be in contango?
3. What was the nature of the risk faced by MGRM and how did they plan to manage it?
4. What were the key assumptions necessary to ensure that the “stack-and-roll” hedging
strategy devised by MGRM be successful?
5. Was MGRM speculating or hedging?
Answer the following general questions in your presentation:
1. Describe the basic nature of the company’s business. Include, where appropriate, the
names of the principal participants in the business scandal that eventually took place.
2. What was the purpose of the use of derivative securities by the company? What types of
derivative securities were being employed, and how?
3. What was the nature of the scandal that ensued? Why did it happen?
4. What was the eventual outcome for the company? How much money was lost?
5. What lesson(s) can be learned from this particular derivatives debacle? Describe the three
most important lessons.
