Basis Risk Analysis and Countermeasures for Enterprises’ Commodity Price Risk Management by Using Futures Hedging Strategy -- A Case Study of “Metallgesellschaft” Hedging Failure

Abstract

As the international economic situation was risingly unsteady and turbulent, many enterprises have come up to make use of the futures market to minimize commodity price fluctuation risks, however, not a few suffering massively high hedging losses. These events has showed that numbers of enterprises had a lack of incisivel comprehension of the basis risk of hedging and made no fully preparation on how to control and erode losses in time as soon as the basis transfers deviated from expection. This article intends to make an in-depth discussion on basis risk through the analysis of the well-known huge losses case of the Metallgesellschaft and put forward effective and logical countermeasures, for enterprises grasping potently of basic risk resisting financial damage. In short, in order to lesson the high financial loss which exceeds the expectation caused by the unusual basis, the enterprises must establish a reasonable and supportive hedging risk assessment and optimal protective stop-loss scheme.