It is now October 2010. A company anticipates that it will purchase 1 million pounds of copper

Question:

It is now October 2010. A company anticipates that it will purchase 1 million pounds of copper in each of February 2011, August 2011, February 2012, and August 2012. 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 companv’s policy is to hedge 80% ofits 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. (Do not make the “tailing”

adjustment described in Section 3.4.)

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 2010? Is the company subject to any margin calls?

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question
Question Posted: