It is now October 2002. A company anticipates that it will purchase 1 million pounds of copper in each of February 2003, August 2003, February 2004, and August 2004. The company has decided to use the futures contracts traded in the COMEX division of the New York Mercantile Exchange 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 pier pound) today and at future dates are as follows: \

Date Spot price Mar 2003 futures Sept 2003 futures Mar 2004 futures Sept 2004 futures price price price price Oct 2002 72.00 72.30 72.80 70.70 64.20 Feb 2003 69.00 69.10 70.20 64.30 76.50

\ Aug 2003

^ O O

^ \

64.80 76.70 88.20 Feb 77 2004

.00 Aug 2004 88.00 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 2002? Is the company subject to any margin calls?