Metallgesellschaft’s long stack-and-roll hedge strategy created interim cash outflows that triggered a liquidity crisis for the firm because petroleum prices dropped dramatically and because the market shifted from backwardation to contango. Requiring periodic cash settlements from its customers on the fixed rate contracts would have mitigated this cash flow crunch. Another solution would have been to purchase put options, which would have generated cash to offset marked-to-market losses and margin calls as spot prices declined. Selling puts would have further exposed the firm to declining petroleum prices. Selling calls would have offer only limited protection against small movements, not the large price drops that triggered the liquidity crisis. |
