Metallgesellschaft MGRM

1
Metallgesellschaft (MGRM)

• MGRM is the U.S. Subsidiary of a German
  conglomerate.
• Synthetic storage.
• A hedging strategy.
• Part of the companys marketing program.
• 5-year or more forward sales at guaranteed rates.
• Hedge against spot rate risk by buying futures
  contracts.
• Unfortunately long futures are not available. So
  rolling short-term futures were used (stacked
  hedging strategy).

2
What Happened Next

• In autumn 1993 futures prices fell for several
  months. The company was forced to incur cash
  drains to settle margin calls.
• HQ liquidated the hedge.

3
Different Opinions

• Culp and miller
• The hedging strategy was working fine, and HQ
  made a mistake by liquidating it.
• German GAAP sent a misleading signal because of
  the prudent LOCOM treatment of hedged assets (a
  hedging loss is reported, but not a profit).
  E.G., MGRM had a 61 million profit under U.S.
  Rules, but a 291 million loss under German rules.

4
Differing Opinions

• Mello and parsons
• The hedging strategy was a disaster because of
  the mismatched periods (long forward sales
  contracts and short futures). They have a
  simulation showing that it was bound to lead to
  cash deficits.
• They claim that management was really speculating
  rather than hedging.

5
Questions

• Who do you think is right? Why?
• What issues arise from this case that are of
  concern to standard-setters?
• Any ideas for a good accounting treatment for
  MGRMs hedge strategy?