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FRM Part I · FRM Exam Part I · Learning From Financial Disasters

Metallgesellschaft Refining and Marketing (MGRM) sold long-term fixed-price fuel delivery contracts and hedged with short-dated energy futures that were rolled monthly. When oil prices fell sharply in 1993, which problem most directly forced the parent to face a severe liquidity crisis?

Margin calls on the futures were the problem. Falling oil prices produced immediate cash losses on the short-dated hedges, while the offsetting gains on the long-term fixed-price contracts would arrive only over years. This cash-flow timing mismatch created a severe funding liquidity crisis.

  1. AMargin calls on futures losses while the offsetting gains on the forward contracts were unrealized and received only over timeCorrect
  2. BA regulatory ban on holding futures positions beyond one month
  3. CDefault by customers on all delivery contracts
  4. DA mandatory write-off of the physical inventory held in storage

Explanation

Falling prices created realized futures losses requiring cash margin, while the gains on the long-term customer contracts accrued only on future delivery. The mismatch between short-term cash outflows and long-term inflows created the funding strain, which is a funding liquidity and basis/rollover issue.

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