A company knows it will sell 100,000 lbs. of copper on December 20. The company will use

futures to hedge its position. The December Futures price is 2.95 $/lb and each futures contract is for 25000 pounds. The firm will take a short position in 4 December contracts and close out the position on December 20 (This is a perfect hedge).

Show what will happen to the firm ( when considering the combined effect of the sale of copper and the Futures contract) on December 20 if the copper price is

a. 2.99 $/lb

b. 2.92 $/lb

Explain, using the answers in a) and b), how this hedge is perfectly eliminating the risk

associated with the changes in copper price.