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It is now October 2004. A company anticipates that it will purchase 1 million pounds ofcopper in each of February 2005, August 2005, February 2006, and August 2006. Thecompany has decided to use the futures contracts traded in the COMEX division of theNew York Mercantile Exchange to hedge its risk. One contract is for the delivery of25,000 pounds of copper. The initial margin is $2,000 per contract and the maintenancemargin is $1,500 per contract. The company's policy is to hedge 80% of its exposure.Contracts with maturities up to 13 months into the future are considered to have sufficientliquidity to meet the company's needs. Devise a hedging strategy for the company.Assume the market prices (in cents per pound) today and at future dates are as follows:Date Oct. 2004 Feb. 2005 Arrg. 2005 Feb. 2006 Arrg. 2006-Spot price 72.00 69.00 65.00 77.00 88.00Mar. 2005 futures price 72.30 69.10Sept. 2005 futures price 72.80 70.20 64.80Mar. 2006 futures price 70.70 64.30 76.70Sept. 2006 futures price 64.20 76.50 88.20 What is the impact of the strategy you propose on the price the company pays for copper? What is the initial margin requirement in October 2004? Is the company subject to anymargin calls?
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