Example of Margin Hedging in Metallgesellschaft

Question

Explain an example of Margin Hedging in Metallgesellschaft and Long Term Capital Management.

Answer 1

Illustrations where margin has caused important damage are Metallgesellschaft and Long Term Capital Management. Writing options is extremely risky. The downside of buying an option is only the initial premium, the upside may be limitless. The upside of writing an option is limited, but the downside could be vast. For this reason, to cover the risk of default in the event of an unfavourable outcome, the clearing houses which register and settle options insist on the deposit of a margin with the writers of options.