Professional Documents
Culture Documents
frm01 MG
frm01 MG
Overall Strategy
MGRM (MG refining and marketing) is US subsidiary of MG. Strategy: fully integrate oil business in the US and develop long term customer relationships. Approach: Use forward delivery contracts (160 million barrels over ten years). Acquired Castle energy in 1989.
N. Takezawa (ICU) Spring 2001 2
Forward Delivery Contract Gain for Client Gain for MG Spot price
PFIX
Time
N. Takezawa (ICU) Spring 2001 3
NYMEX futures price > fixed price MG pays 50% of price difference NYMEX futures price > exit price In both cases, situation where the client is in the money.
PFIX
1992
2002
Time
5
10 years
N. Takezawa (ICU) Spring 2001
Long futures
PFIX
Spot price
MG position
N. Takezawa (ICU) Spring 2001 6
Regular unleaded gasoline NY harbor no. 2 heavy oil West Texas Intermediate Grade Light Sweet Crude Oil on NYMEX
Futures hedge
Cost relative to physical storage? Liquidity relative to long dated market? Short dated, however, requires roll-over strategy in this scenario.
Price
Backwardation: spot (nearby futures price) greater than deferred futures price) For example, it is the end of November
Sell Buy
price
92
6/93 9/93
12/93 maturity backwardation contango backwardation
92
10/94
11
Total 1.3 billion dollars Loss of 20-30 million dollars/month on the roll over hedge due to contango curve Main lenders: 1.9-2.1 billion dollar rescue plan
12
Let us assume the delivery contracts were a good marketing strategy. Hedge Ratio: one to one vs optimal (minimum variance, max. expected utility). Tailing the hedge. Large positions on the NYMEX Backwardation vs Contango: contango is unusual but not without precedent. Prepared for worst case scenario? Value at risk
N. Takezawa (ICU) Spring 2001 13
MG Supervisory Board: 1) liquidated derivative position 2) liquidated forward contract positions. Right Decision?
N. Takezawa (ICU) Spring 2001 14