The LME Nickel Big Short case examines the short squeeze that occurred on the London Metal Exchange (LME) in March 2022, resulting in a sudden and massive quadrupling of nickel prices in just two days. This dramatic price surge caused chaos within the industry and resulted in significant losses for investors who had bet against the market, with Tsingshan Holding Group being a major focus. In response, the LME was forced to suspend trading for the first time in three decades.
The purpose of this case is to encourage students to engage with a range of complex issues, including the challenges faced by commodity industry firms in managing risk, the tangible impact of financial instrument innovations, and the role derivative exchanges play in facilitating price discovery. Through exploring these themes, students will be challenged to think critically about the workings of the market and the ways in which different actors can contribute to and shape its outcomes.
Upon completion of the case study, students will be equipped to:
- Comprehend the specifications and settlement arrangements of futures contracts on nickel.
- Engage in discussions concerning the roles and potential risks associated with various actors involved in a corporate hedging position, including hedging firms, brokers, financing banks, exchanges, clearing houses, and down-stream firms.
- Analyze the mechanism and rationale underlying a short squeeze.
- Devise and evaluate an effective hedging strategy for firms operating within the commodity industry. This will involve applying concepts such as cross hedging and basis risk in corporate risk management, to determine the most appropriate futures contract and hedging position.
- Recognize and assess the tangible impacts of financial instrument innovations.