The Failure of Hedging Practice in Terms of Model Design: A Case Study of MGRM

Metallgesellschaft Refining and Marketing (MGRM) reported enormous losses on its positions in energy futures and swaps. The failure of the hiding practice leads to a case study of MGRM in order to figure out the attribution behind the hedging model that incurs such loss. The case study is based on secondary information retrieval and literature analysis. Specifically, the paper will look at the role of the “stack-and-roll” strategy in its hedging model design, analyze the required assumptions for the model to be effective, and the significance of backwardation in the model’s revenue streaming, as well as evaluate its performances in different scenarios. Based on the analysis, the disconnect of the company market, as well as the breakdown of communication between both companies, led to its failure. Finally, the causal relationship between the model’s faulty design and its collapse in market fluctuation has also been investigated in terms of cash flow risk, counterparty risk, market-to-market risk. A possible direction of future research is to conduct quantitative research on primary data on the evaluation of the variance hedging path. These results and findings of this paper revealed the faulty elements in MGRM’s hedging model, which can be used as a guideline for the betterment of future financial operations.