NYMEX withdrew its hedging exemption once MGRM announced the end of its hedging program.
Edwards and Canter (1995a, b) note that MGRM had at least three hedging options open to it: physical storage, long-dated forward contracts, and some variant of a stack-and-roll strategy.
Alternatively, MGRM could have chosen among a number of derivatives-based hedging strategies involving either futures or forward contracts, or some combination of both.
So although MGRM could have hedged its exposure by buying long-term forward contracts from an OTC derivatives dealer, doing so would have reduced, if not eliminated, any profits from its marketing program.
Once near-dated energy futures and forward markets began to exhibit contango, MGRM was forced to pay a premium to roll over each stack of short-term contracts as they expired.
It thus appears that MGRM could have recouped most if not all of its losses simply by sticking to its hedging program.
The second concerns the steps MGRM could have taken to reduce the variability of its cash flows.
Thus, while a stack-and-roll hedging strategy for either commodity would have produced positive cash flows on average before 1975, such a strategy would have lost money consistently over the ensuing ten-year period - meaning that a hedger employing a stack-and-roll strategy of the type used by MGRM in either soybean or copper futures markets would have experienced large and persistent losses after 1975.
Along with Mello and Parsons (1995a, b), Edwards and Canter (1995a, b) argue that MGRM was overhedged because short-term oil futures prices tend to be much more volatile than prices on long-term forward contracts.
First, Culp and Miller (1994b, 1995d) demonstrate that a stack-and-roll hedge of the type employed by MGRM will offset perfectly any changes in the value of a long-term forward commitment so long as the factors determining basis - interest rates, storage costs, and the implicit convenience yield associated with physical storage - do not change.
bank had offered to provide secured financing to MGRM based on a plan to securitize its forward delivery contracts.