One of the most celebrated financial disasters of the 1990s was the mas-sive loss racked up in crude oil trading by Metallgesellschaft Refining and Marketing (MGRM), an American subsidiary of the international trading, engineering, and chemicals conglomerate Metallgesellschaft (MG). In 1992, MGRM implemented an apparently lucrative marketing

strategy. The company agreed to sell specified amounts of petroleum prod-ucts every month for up to 10 years, at pre-agreed prices above the current market price. The company then used a stack hedging strategy, under which it purchased a succession of short-term energy futures to hedge its long-term commitments. The assumption was that if oil prices dropped, the futures position would lose money, while the fixed-rate position would increase in value. If the oil price rose, on the other hand, the futures gains would offset the losses from the fixed-rate position. This neat solution turned out to be badly flawed. Under MGRM's strat-egy, the company would gain over a long period of time if the oil price dropped, as it sold oil month-by-month at the pre-arranged higher rate. However, it would be exposed to losses made on the energy futures immedi-ately, as margin calls came in. In addition, there was no stable relationship between the long-term forward commitments and the short-term energy futuresanother major risk for the company. Thus, when oil prices actually dropped, the company faced a cash flow crisis and ultimately a funding crisis that reached all the way back to the parent company. In December 1993, MG was forced to bail out MGRM and cash in its positions at a loss totaling more than $1 billion.

Academics have been arguing about whether MG did the right thing

ever since. Theoreticians such as the Nobel prize-winning economist Merton Miller and his colleague Christopher Culp maintain that had MG been able to persevere, in the long term it would have made a profit, recouping the losses on the futures through profits on the sale of petroleum. Others have pointed out that this is irrelevant, given that the company could not have done so in practice, while some have cast doubt on the size of the potential long-term gains. An auditors' report, commissioned by MG shareholders, maintains that 59 million barrels' worth of the long-term contracts had a negative value of about $12 million, so the value of these contracts could never have offset the losses, even in the long term. The MG episode illustrates a concept that can be referred to as funding riskthe risk that positions may be profitable in the long run, but bankrupt a company in the short run. This is a risk that arises if negative cash flows are mismatched with positive cash flows, with the emphasis jointly placed on cash and flows. It is not enough just to think about how much money a strategy will bring in; risk managers must also think about when that money will come in.

From the above case, I will need help with 

(a) The central issue the case is describing, 

(b) The problems that need to be addressed from the case,

 (c) What considerations would one identify as the Chief Risk Officer, 

(d)Agree or disagree with the solution described in the case and provide support for your position, 

(e) Provide a concise summary of the items you considered and your conclusion.