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Metallgesellschaft: A prudent hedger ruined, or a wildcatter on NYMEX?

Metallgesellschaft: A prudent hedger ruined, or a wildcatter on NYMEX? Stephen C. Pirrong is an Assistant Professor of Finance at Washington University. The Journal of Futures Markets, Vol. 17, No. 5, 543–578 (1997) 1997 by John Wiley & Sons, Inc. CCC 0270-7314/97/050543-36 Pirrong increased firm value while protecting MG against spot price increases over the 10-year life of the program. They recognize that this strategy forced the firm to bear basis risk, but claim that this basis risk was small relative to the risk inherent in the firm’s fixed price contracts. A definitive resolution of this debate cannot be achieved through a priori argument; the data must be the ultimate arbiter. This article undertakes a thorough analysis of the dynamics of crude oil futures prices to determine the riskiness of the barrel-for-barrel strategy relative to alternative strategies available to the firm. This analysis of variance minimizing hedge ratios is more thorough and employs more sophisticated econometric techniques than previous studies by Mello and Parsons (1995) and Edwards and Canter (1995). It thus allows a more complete critique of the prudence of the barrel-for-barrel strategy. The empirical results are starkly revealing. Given the behavior of crude oil prices, the variance-minimizing hedge ratio during 1993 was far less than 1. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Futures Markets Wiley

Metallgesellschaft: A prudent hedger ruined, or a wildcatter on NYMEX?

Pirrong, Stephen Craig
The Journal of Futures Markets , Volume 17 (5) – Aug 1, 1997
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References (15)

Publisher
Wiley
Copyright
Copyright © 1997 John Wiley & Sons, Inc.
ISSN
0270-7314
eISSN
1096-9934
DOI
10.1002/(SICI)1096-9934(199708)17:5<543::AID-FUT3>3.0.CO;2-F
Publisher site
See Article on Publisher Site

Abstract

Stephen C. Pirrong is an Assistant Professor of Finance at Washington University. The Journal of Futures Markets, Vol. 17, No. 5, 543–578 (1997) 1997 by John Wiley & Sons, Inc. CCC 0270-7314/97/050543-36 Pirrong increased firm value while protecting MG against spot price increases over the 10-year life of the program. They recognize that this strategy forced the firm to bear basis risk, but claim that this basis risk was small relative to the risk inherent in the firm’s fixed price contracts. A definitive resolution of this debate cannot be achieved through a priori argument; the data must be the ultimate arbiter. This article undertakes a thorough analysis of the dynamics of crude oil futures prices to determine the riskiness of the barrel-for-barrel strategy relative to alternative strategies available to the firm. This analysis of variance minimizing hedge ratios is more thorough and employs more sophisticated econometric techniques than previous studies by Mello and Parsons (1995) and Edwards and Canter (1995). It thus allows a more complete critique of the prudence of the barrel-for-barrel strategy. The empirical results are starkly revealing. Given the behavior of crude oil prices, the variance-minimizing hedge ratio during 1993 was far less than 1.

Journal

The Journal of Futures Markets – Wiley

Published: Aug 1, 1997

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