Ashanti Goldfields, 1999

At a glance

What happened

Ashanti Goldfields had hedged about eleven million ounces of gold, roughly seven years of its production, with forward sales and option structures spread across seventeen banks. In September 1999, fifteen European central banks announced the Washington Agreement, capping their gold sales. The gold price jumped from around $255 an ounce to about $330 in two weeks. The hedges went deeply out of the money, the banks called for collateral the company did not have, and Ashanti was forced into a standstill that cost its shareholders heavily.

Why it went wrong

The hedges were bilateral contracts with margin terms, so a sharp price rise produced large cash calls within days. The offsetting gain was gold still in the ground, which no bank accepts as collateral. The book also went beyond simple forward sales: sold call options meant the company had given away the upside and was effectively short volatility. At seven years of output, it was a position rather than a hedge of production the company could actually see.

What it teaches

Hedge the exposure you really have, over a horizon you can see. Selling options turns a hedge into a volatility trade that costs cash when the market moves in your favour. And agree collateral terms before you need them, because that is exactly when counterparties are least flexible. The same pattern, a sound hedge that could not be funded, returned in the nickel squeeze and the gilt crisis.

Key terms

Producer hedge

Selling future output forward at a fixed price to insulate a mine or field from a falling market.

Forward sale

An agreement to deliver a quantity at an agreed price on a future date — the orthodox hedging instrument.

Sold call

An option written away for premium, which gives up the upside on the very asset the seller produces.

Hedge horizon

How far ahead output is sold, and so how much unmined production a mark-to-market applies to.

Standstill agreement

A negotiated pause in counterparties’ rights to call collateral or close out, bought here with equity.

Washington Agreement

The September 1999 accord in which European central banks capped gold sales, reversing a long price decline.

Where it sits in the course

Case studies like this one are used throughout risk management teaching, including FRM® preparation, as worked examples of hedging, collateral and funding liquidity risk. In OTC Learn the lesson runs in five steps: what happened, the position, why it broke, what it cost and what it teaches, followed by a worked example with the numbers. See the lesson outline.

Related case studies

• The LME nickel squeeze, 2022A hedge that could not be delivered into

The instruments behind it

OTC Learn lessons on the products this case turns on:

• Commodity ForwardAgree a price today for delivery later
• Commodity OptionCap or floor a commodity price