Difference between revisions of "Matching cash flows and the importance of accounting"

Revision as of 01:40, 22 June 2017

Firm Involved

• Metallgesellschaft

Year of the event

1993

Description of the case

Metallgesellschaft used long term hedging instruments to hedge short-term (but recurring) risk. The strategy is neutral economically, but margin calls from the short term leg caused a huge outflow of cash and large accounting losses.

Take-aways

Match the cash flows when designing a hedging strategy: being economically hedged is not necessarily sufficient. One must also take into account accounting aspects, as some positions need to be netted, some Marked to market and some others not, which can result in large losses