Liquidity Crisis Analysis

Metallgesellschaft AG was one of Germany's largest commodity trading companies. The firm had entered into long-term forward contracts to deliver oil at fixed prices, hedged with rolling short-term futures. The strategy was theoretically sound: the company was long oil through forwards and short through futures, creating a net-zero market exposure.

The flaw was liquidity. When oil prices fell sharply, the futures positions required immediate margin calls while the forward contracts generated no offsetting cash until delivery. The firm faced a liquidity crisis despite having a profitable long-term position. Within months, Metallgesellschaft was forced to unwind its positions at massive losses, nearly bankrupting the company.

This case demonstrates that hedging effectiveness cannot be evaluated solely on risk reduction. The cash flow timing of hedge instruments must match the cash flow profile of the underlying exposure, or the hedge itself becomes a source of risk.

On January 15, 2015, the Swiss National Bank abandoned its currency floor of 1.20 CHF per EUR. The exchange rate dropped from 1.20 to below 0.90 within seconds, then stabilized around 1.05. The move was unprecedented in modern currency markets for a major currency pair.

Many investors holding CHF-denominated loans had stop-loss orders in place to limit currency exposure. These orders were designed to trigger at specific price levels and close positions automatically. In the flash crash, the market gapped through stop-loss levels without ever trading at the trigger prices. Orders that should have executed at 1.18 instead executed at 1.00 or worse.

The alternative hedge was put options. The cost comparison reveals the hidden risk of stop-loss strategies: they are cheap in normal markets but fail catastrophically in regime changes. Put options cost more upfront but provide reliable protection regardless of market microstructure.