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In Metallgesellschaft's Hedging Debacle the company arranged long term forward contracts to sell oil/energy. Their hedge was to sell short-term futures contracts and roll into
In Metallgesellschaft's Hedging Debacle the company arranged long term forward contracts to sell oil/energy. Their hedge was to sell short-term futures contracts and roll into new months(called a stacked hedge). The hedge turned out poorly for MG becausethe stacked hedge works when markets are in backwardation and the basis risk resulted in negative profit between the selling the futures and delivering in the forwards.
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