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point before maturity. This simply means that if the firm sells a futures contract to hedge something, it will buy the same contract at a later date, thereby eliminating its futures position. In fact, futures contracts are very rarely held to maturity by anyone (despite horror stories of individuals waking up to find mountains of soybeans in their front yards), and, as a result, actual physical delivery very rarely takes place.

A related issue has to do with contract maturity. A firm might wish to hedge over a relatively long period of time, but the available contracts might have shorter maturities. A firm could therefore decide to roll over short-term contracts, but this entails some risks. For example, Metallgesellschaft AG, a German firm, nearly went bankrupt in 1993 after losing more than $1 billion in the oil markets, mainly through derivatives. The trouble began in 1992 when MG Corp., a U.S. subsidiary, began marketing gasoline, heating oil, and diesel fuel. It entered into contracts to supply products for fixed prices for up to 10 years. Thus, if the price of oil rose, the firm stood to lose money. MG protected itself by, among other things, buying short-term oil futures that fluctuated with near-term energy prices. Under these contracts, if the price of oil rose, the derivatives gained in value. Unfortunately for MG, oil prices dropped, and the firm incurred huge losses on its short-term derivatives positions without an immediate, offsetting benefit on its long-term contracts. Thus, its primary problem was that it was hedging a long-term contract with short-term contracts, a less-than-ideal approach.

For information on the regulation of futures contracts, go to the Commodity Futures Trading Commission at www.cftc.gov.

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