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

MGRM had sold the equivalent of 160 million barrels of fixed-price delivery commitments and held a stack-and-roll hedge of long futures positions of roughly 55 million barrels of front-month contracts. Suppose the hedge ratio was one-for-one in barrel terms rather than the 55 million figure, and the front-month price falls by USD 6 per barrel. What would be the variation margin outflow on a 160 million barrel long futures position?

The variation margin outflow is USD 960 million, found by multiplying the 160 million barrel long futures position by the USD 6 per barrel price decline. Futures losses are settled in cash daily, which is why large stack-and-roll positions create severe funding liquidity demands when prices fall.

  1. AUSD 960 millionCorrect
  2. BUSD 330 million
  3. CUSD 160 million
  4. DUSD 26.7 million

Explanation

Variation margin loss = position size x price change = 160 million x USD 6 = USD 960 million. USD 330 million uses 55 million barrels, which is not the stated position. USD 160 million ignores the price move's size, and USD 26.7 million divides rather than multiplies.

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