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