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2. A German company, Metallgesellschaft (MG), in the early 1990 s had sold a huge volume of 5-to 10-year heating oil and gasoline fixed-price supply
2. A German company, Metallgesellschaft (MG), in the early 1990 s had sold a huge volume of 5-to 10-year heating oil and gasoline fixed-price supply contracts to its customers at 6 to 8 cents above market prices. It hedged its exposure with long positions in short-dated futures contracts that were rolled forward. As it turned out, the price of oil fell and there were margin calls on the futures positions. Considerable short-term cash flow pressures were placed on MG. The members of MG who devised the hedging strategy argued that these short-term cash outflows were offset by positive cash flows that would ultimately be realized on the long-term fixed-price contracts. However, the company's senior management and its bankers became concerned about the huge cash drain. As a result, the company closed out all the hedge positions and agreed with its customers that the fixed-price contracts would be abandoned. The outcome was a loss to MG of $1.33 billion. Explain how hedging using futures can lead to cash-flow problems such as those experienced by MG
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