It is now March 2021. A company anticipates that it will purchase 1 million pounds of copper in each of August 2021, February 2022, August 2022, and February 2023. The company has decided to use the futures contracts traded by the CME Group to hedge its risk. One contract is for the delivery of 25,000 pounds of copper. The initial margin is $5,500 per contract and the maintenance margin is $5,000 per contract. The company's policy is to hedge 80% of its exposure. Only contracts with maturities up to 13 months into the future are considered to have met the company's liquidity requirements to be used at any given time. Devise a hedging strategy for the company. (Do not make the adjustment for daily settlement described in Section 3.4.) Assume the market prices (in USD per pound) today and at future dates are as follows. What is the impact of the strategy you propose on the price the company pays for copper? What is the initial margin requirement? Is the company subject to any margin calls? Feb 2023 4.8825 Spot Copper Price Sept 2021 Futures Price Mar 2022 Futures Price Sep 2022 Futures Price Mar 2023 Futures Price Prices now (Mar 2021) and in the future Mar 2021 Aug 2021 Feb 2022 Aug 2022 4.2050 3.6025 3.3575 4.3950 4.2150 3.6065 4.2235 3.6145 3.3595 3.6220 3.3670 4.4075 3.3755 4.4190 4.8860 It is now March 2021. A company anticipates that it will purchase 1 million pounds of copper in each of August 2021, February 2022, August 2022, and February 2023. The company has decided to use the futures contracts traded by the CME Group to hedge its risk. One contract is for the delivery of 25,000 pounds of copper. The initial margin is $5,500 per contract and the maintenance margin is $5,000 per contract. The company's policy is to hedge 80% of its exposure. Only contracts with maturities up to 13 months into the future are considered to have met the company's liquidity requirements to be used at any given time. Devise a hedging strategy for the company. (Do not make the adjustment for daily settlement described in Section 3.4.) Assume the market prices (in USD per pound) today and at future dates are as follows. What is the impact of the strategy you propose on the price the company pays for copper? What is the initial margin requirement? Is the company subject to any margin calls? Feb 2023 4.8825 Spot Copper Price Sept 2021 Futures Price Mar 2022 Futures Price Sep 2022 Futures Price Mar 2023 Futures Price Prices now (Mar 2021) and in the future Mar 2021 Aug 2021 Feb 2022 Aug 2022 4.2050 3.6025 3.3575 4.3950 4.2150 3.6065 4.2235 3.6145 3.3595 3.6220 3.3670 4.4075 3.3755 4.4190 4.8860
