Metallgesellschaft

[BHeng9611]

Hi all,

Based on FRM part 1 book 1 chapter 9, learning from financial disaster topic, I do not get why there is gains on the underlying forward contracts with customers for Metallgasellschaft (MG) when MG had short positions of forward contracts with customer when there is a contango? There should be losses instead of gains from it right? Based on my understanding, when you short a position, it means you are expecting security to go down in price and contango means price of it increases rather than decreases. This means that MG should be make losses instead of gains for this forward contracts.

Seek your kind assistance on this question.

Thank you in advance,
BX

 

[yLam4028]

Based on my understanding, when you short a position, it means you are expecting security to go down in price and contango means price of it increases rather than decreases

first part about expecting security to go down - I agree
second part about contango - I disagree

contango is upward sloping over time i.e. higher price for farer contract. For a contract with 3 years of maturity it may be selling at 105. A year later it is a contract with 2 years of maturity. if the market is in contango the price will actually DROP ( not increase ). Now the seller can close its position by going long in a cheaper price, resulting in a gain.

 

[BHeng9611]

Okay, thanks for your explanation. I realised what is the meaning of contango already. Expecting a price of asset to drop means expecting demands to drop. Expecting demand to drop means it is contango. Contango graph shows you the future price, not the asset price.