It is now October 2014. A company anticipates that it will purchase 1 million pounds of copper in each of February 2015, August 2015, February 2016, and August 2016. 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. Contracts with maturities up to 13 months into the future are considered to have sufficient liquidity 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 in the following table. 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 2014? Is the company subject to any margin calls?

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Date Oct. 2014 Feb. 2015 Aug. 2015 Feb. 2016 Aug. 2016 Spot price 372.00 369.00 365.00 377.00 388.00 Mar. 2014 futures price 372.30 369.10 Sept. 2014 futures price Mar. 2015 futures price Sept. 2015 futures price 372.80 370.20 364.80 370.70 364.30 376.70 364.20 376.50 388.20