Metallgesellschaft's hedge lost $1.3B — the hedge was worse than the risk

Metallgesellschaft (MG), a German industrial conglomerate, offered its US customers long-term fixed-price oil supply contracts (up to 10 years). To hedge the price risk, MG's US subsidiary used short-term futures and swaps — a strategy called 'stack and roll,' where short-dated hedges are repeatedly rolled forward.

The strategy created a mismatch: the long-term contracts gained value when oil prices fell (MG was locked into selling at a higher price), but the short-term futures lost value immediately when prices dropped, requiring margin calls. In late 1993, oil prices fell, and MG faced massive margin calls on its futures positions.

MG lost approximately $1.3 billion, and the company was bailed out by its banks. The case became a textbook example of basis risk: the hedge instrument (short-term futures) did not match the exposure (long-term contracts), and the liquidity mismatch (daily margin calls vs. 10-year revenue) turned a price hedge into a liquidity crisis.