Read the paper, ‘Metallgesellschaft and the Economics of Synthetic Storage’ by Culp and Merton (1995). The article discusses the case of MG’s hedging strategy in the futures market that went wrong in the 1990’s.
Write an analytical report of 1,250 word on MG’s risk management style and assess the reasons that led to the debacle. In your analysis, cover at least the following:
• The underlying risk position that MG was compelled to hedge,
• comment on the implementation of MG’s hedge strategy,
• what went wrong and who should be blamed for it.
In the report, demonstrate your technical knowledge of how the futures market and hedging with futures work. Amon other things, define all jargons and terminology from the futures market whenever you use them.
PS: Make your presentations neat, concise and clear. Avoid long and complicated sentences. A good report will be one that has been able to sift through the vast amount of information and present only what is necessary and important.
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