METALLGESELLSCHAFT AND THE ECONOMICS OF SYNTHETIC STORAGE

authors: Christopher L Culp, Merton H Miller year: 1995 See in Zotero

Literature Notes

Argue that MGRM’s strategy wasn’t wrong (or even speculative) - or any more wrong than other strategies. It could have made money if top management knew what was going on.

MGRM was in the business of selling and storing oil, not being experts on price movements (Whats happening in OPEC, etc…). It’s strategy was based on maximizing profits from selling (delivering) and storing oil.

Used a stacked synthetic storage strategy with a 1-1 hedge ratio- explained on page 65

Some critiques of their strategy were

• Rollever costs: cost of selling the almost expired future and buying one for expiry a month later. Most of the time these were negative though.
• The margin calls: As oil prices fell, MGRM had to pay some margin calls on the futures they were holding. Long term though, those losses would be made up by the extra profit from the oil delivery (pg 70-71)