• A comprehensive, wide-ranging and high-level examination of corporate hedging design and management

• A multi-faceted account of the MG debacle from the viewpoints of key commentators

CONTENTS
Preface

Introduction
Christopher L. Culp and Merton H Miller

The Foundations of Hedging in Futures Markets

The Theory of Hedging and Speculation in Commodity Futures
Johnson

The Hedging Performance of the New Futures Markets
Ederington

Futures Trading and Hedging
Working

New Concepts Concerning Futures Markets and Prices
Working

Rationales for Corporate Hedging

Should Firms Use Derivatives to Manage Risk?
Fite and Pfleiderer

The Determinants of a Firm's Hedging Policies
Smith and Stulz

Risk Management: Coordinating Investment and Financing Policies - Rethinking Risk Management
Stulz

The MGRM Controversy—Hedging Objectives Do Matter

Metallgesellschaft and the Economics of Synthetic Storage
Culp and Miller

Auditing the Auditors
Culp and Miller

Simulating Supply
Bollen and Whaley

Maturity Structure of a Hedge Matters: Lessons from the Metallgesellschaft Debacle
Mello and Parsons

The Collapse of Metallgesellschaft: Unhedgeable Risks, Poor Hedging Strategy, or Just Bad Luck?
Edwards and Canter

Hedging in the Theory of Corporate Finance: A Reply to Our Critics
Culp and Miller

The Mathematics of Hedging Long-Dated Obligations with Short-Dated Futures

Analytics Underlying the Metallgesellschaft Hedge: Short-Term Futures in a Multi-Period Environment
Hilliard

Hedging Long Maturity Commodity Commitments with Short-Dated Futures Contracts
Brennan and Crew

Metallgesellschaft: A Prudent Hedger Ruined, or a Wildcatter on NYMEX?
Pirrong

Hedging Long-Term Exposures with Multiple Short-Term Futures Contracts
Neuberger

Hedging Long Run Commitments: Exercises in Incomplete Market Pricing
Ross

The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging
Schwartz

Conclusion - The State of the Corporate Hedging Debate
Culp and Miller

Institution of Mining and Metallurgy (December 1999)
In 1993 Metallgesellschaft lost over US$ 1, 000 000 000 when a sudden fall in oil prices undermined its strategy of stack-and-roll hedging for fixed-price contracts with a buy-out option. The events provoked considerable debate over whether stacking and rolling over short-term futures can in fact provide an effective hedge against price risk, and whether the problem was that the supervisory board and supporting banks did not understand the strategy and turned paper losses into cash losses by premature liquidation. A collection of articles on the issues is presented. Classic papers deal with the foundations of hedging in futures markets (Part I, 4 papers), the rationales for corporate hedging (Part II, 4 papers), and the mathematics of hedging long-dated obligations with short-dated futures (Part IV, 6 papers). The six articles in Part III focus on the debate about why Metallgesellschaft was hedging and how those motives would have affected the implementation of its hedging programme, while the papers in Part IV focus on a second debate, over how long-term commitments can best be hedged with short term futures.
Reviewed by Glyn Holton, Contingency Analysis
Technical: 2/5

Today's debate on corporate hedging is both theoretically intriguing and of tremendous practical importance for businesses. The question of what risks to hedge and exactly how to hedge them must underlie both financial risk management as well as corporate strategy. On one hand, we might suppose that businesses should never hedge risks because stock holders can more effectively manage risks by simply diversifying their investment portfolios. While this position is defensible based upon certain financial models, the applicability of those models must be questioned. On the other hand, if we accept that some risks should be hedged, we must struggle with both the justifications as well as the implementation of hedging activities. Such issues lead inevitably to the questions of corporate goals, hedging techniques and the adequacy of oversight.

Using the Metallgesellschaft debacle an a focal point, Christopher Culp and Merton Miller have compiled a collection of seminal papers on corporate hedging. Their book provides both a broad sampling from the academic literature as well as a carefully designed survey of important topics. The book's 20 papers are divided into four sections covering:

• Theory and practice of hedging in futures markets

• Rationals for corporate hedging, including the development of hedging policies

• The Metallgesellschaft debacle

• The mathematics of hedging long-dated obligations with short-dated futures.

The book targets sophisticated audiences. Concepts are well developed, rigorous presented and meticulously referenced. There is some mathematics, but it appears primarily in later chapters. Audiences include managers interested in policy, traders who must understand complex hedging strategies and readers interested in the fall of Metallgesellschaft. For risk managers, both at financial organizations as well as corporations, the entire book is a gem.