Very helpful video but I have one comment. The German accounting regulations did not require the parent to "realize" losses immediately, however it did require the losses to be "recognized". Realization of gains or losses only occurs when the positions are closed out and you take a cash gain or loss. So while the accounting showed losses on the books, the losses were only realized once the board mandated that these positions be closed out. They were "recognized" from an accounting standpoint on a daily basis, but not "realized".
The key difference between a futures contract and an OTC forward (the stack and roll is conducted in liquid futures market) is that the clearinghouse is really the (intermediary) counterparty to the trades, so the long/short always have the ability to close out their position (to close, they just enter a short to offset the long or vice versa and realize the roll gain/loss). The clearinghouse ensures virtually no counterparty risk; if they "forget," yes they promised to buy/deliver the commodity
The rollover profits would happen only when the market gives out normal-backwardation at the time of closing the 1st contract and entering the new 2nd contract in the stack-roll futures hedging strategy.
David - thanks - the one big lesson that is distilled out of every financial disaster is that in the long term there will be ups and downs - however, human mind tends to extrapolate linearly - so in case there is a contago, we expect it to continue. But it never does - the same issue undid LTCM, amaranth and many others.
Could this have been avoided if both were futures contract. Mtm daily netted off . Wondering why they chose a forward than just trading a calendar spread on futures
Hi ! Suppose I have: Buying: 200T - supplier A (index LME) : 100T = risk - supplier B (flat rate) : 100T = no risk Selling: 200T - client A (index LME): 100T = no risk - client B (Flat rate): 50T = risk - client C (Pass trhough): 50T = no risk How many Tn are "at risk" ? Risk = 100 - 150 = - 50, so 0 Tn at risk ??? Thanks a lot !!!
For accounting purposes, METALLGESELLSCHAFT reported the earnings of its futures contracts, but not the earnings for its long term commitments. Could this affect the hedging strategy? Suppose you could report both commitments. Would the final result be different? Why?
My question relates to stack hedges... On expiration, what if the counterparty demands 120,000 barrels? Can you please elaborate how the company 'closes' the contract and does this 'closing' entail risk of not being closed for some reason and having to honour the original contract with all 120,000 barrels? Thanks so much!
Great video, but you should elaborate on the failures of management to withstand this problem. For instance, they didn't extend try to get credit from any of the banks to keep them afloat when they had Deutsche Bank on the board of directors. They also fired all the people who designed (and understood) the hedging strategy after the market went into contango.
