9. Hedging stratngy to protect against falling prices Price fluctuations in cormmodities can have significant consequences for companies, especialy if the fuctuation involves a prime raw material for a company, Oifferent companies wl adopt different strategies to manage the risk in price fluctuations, indluding adjusting the timing of their commodity purchanss maintaining a safety stock of their raw materials, and hedging. Consider the case of Cranked Coffee Company, alarge copper-produding company The company's cost of producing copper is about $3.75 per pound. The current market price for copper is s4 so per pound. The six-month futures price for copper is $4.69 per pound. At this seling price, the company can maintain its eamings growth. The company esp to produce 1,000,000 pounds of per in this six ?onths. (Note: Copper futures are traded at e standerd size of 250,000 pounds.) f the company does not hedge the copper it produces, i can expect to eom e total revenue of ond of six monts at the contracts for If Cranked Cofflee places a hedge on its copper production in the futures market it woutd delivery in six months at Gelivery price of 4.69 per pound to generate profts ht meinten its desired earmings growts. When the conbract comes due in o menths, the spot ace of copper 3.19 pund in the csh merkets Prices on the new sic-month us contracts in coound Cacuiste the epcted revenue in the following markets Putures Market tet goin or loss in the utores et gain r lossn the cesn market O $3,990,000 o $1,500,000 -3560,000 3.00b 703000 The cost of production of copper i 5 750 99uscrenid ten n the cash marke This gain and loss offiset each other, ahd thecpy be neferred to as a placing the bedge This hedging sretegy wo