An industrial hedger, 1993: a hedge with a margin clock

Metallgesellschaft, a German industrial group, ran an oil-marketing programme in the early 1990s that sold customers fixed-price delivery contracts running as long as ten years. To offset the price risk of promising oil at a fixed price for a decade, it held a large long position in short-dated oil futures, rolled forward each month. The offset was real. The cash flows were not symmetrical.

Through 1993 oil prices fell. The futures position lost value and those losses were settled daily in cash as variation margin — money out of the door, every day, on a schedule set by the exchange. The matching gain sat in the customer contracts, where it accrued as an unrealised benefit spread over years of future deliveries and produced no cash at all in 1993.

A second cost arrived through the roll. Rolling a long futures position forward is free only if the further-dated contract is not more expensive. When the market moved into contango — later delivery priced above earlier — each monthly roll became a payment. So the position bled cash from two directions while the offsetting asset stayed illiquid and unfinanceable.

The funding requirement was reported at the time as well over a billion dollars. The positions were closed out across late 1993 and early 1994, and the reported loss was around 1.3 billion dollars. The mechanism generalises well beyond oil: a hedge is only as good as the financing of its cash leg, which is the same point Track 7 lesson 19 makes about margin on a hedge competing with the line it protects.