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FRM Part I · FRM Exam Part I · Using Futures for Hedging

A firm uses a stack-and-roll strategy with short-dated futures to hedge a long-dated fixed-price forward sale commitment, as in the Metallgesellschaft case. Which risk most directly caused the firm's liquidity strain when prices fell sharply?

The main problem was funding liquidity: when prices fell, daily margin calls on the stacked futures drained cash immediately, while the offsetting gains on the long-dated fixed-price commitments would be received only over future years.

  1. ADaily margin calls on losing futures positions, while offsetting gains on the long-term commitments were not realized in cash until laterCorrect
  2. BDelivery risk from physical settlement of the nearby contract
  3. CCounterparty default on the long-term forward customers
  4. DTailing the hedge too aggressively, which left the firm over-hedged

Explanation

Falling prices produced losses on the long futures that were settled in cash daily via margin, while the gains on the fixed-price forward sales accrued only over many years. This funding-liquidity mismatch, worsened by backwardation or contango roll costs, forced large cash outflows. The other options are not the central cause.

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