Solution-Devise a hedging strategy for the company

Devise a hedging strategy for the company

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Reference no: EM132719755

(Optional & Challenging) It is now October 2020. A company anticipates that it will purchase 1 million pounds of copper in each of February 2021, August 2021, February 2022, and August 2022. The company has decided to use the futures contracts traded in the COMEX division of the CME Group to hedge its risk. One contract is for the delivery of 25,000 pounds of copper. The initial margin is $2,000 per contract and the maintenance margin is $1,500 per contract. The company's policy is to hedge 80% of its exposure.

(a) Devise a hedging strategy for the company. Show the trading strategy at each time.

(b) Assume the market prices (in cents per pound) today and at future dates are as follows. Based on your proposed strategy, what is the real cost of each copper purchase for the company?

Price Oct 2020 Feb 2021 Aug 2021 Feb 2022 Aug 2022
Spot Price 372.00 369.00 365.00 377.00 388.00
Mar 2021 Futures 372.30 369.10
Sep 2021 Futures 372.80 370.20 364.80
Mar 2022 Futures 370.70 364.30 376.70
Sep 2022 Futures 364.20 376.50 388.20

Reference no: EM132719755

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Devise a hedging strategy for the company

Reference no: EM132719755

Reference no: EM132719755

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