It is now October 2007. A company anticipates that it will purchase 1 million pounds of copper in each of February 2008, August 2008, February 2009, and August 2009. The company has decided to use the future contracts traded in the COMEX division of the New York Merchantile Exchange to hedge its risk. One contract is for the delivery of 25,000 pounds of copper. The initial margin is $2,000 and maintenance margin is $1500 per contract. The companys policy is to hedge 80% of its exposure. Contracts with maturities upto 13 months into the future are considered to have sufficient liquidity to meet the companys needs.

Assume the market prices (in cents per pound) today and at future dates are as follows:

Date: Oct 2007. Feb 2008 Aug2008. Feb 2009 Aug. 2009

Spot Price. 372.00. 369.00. 365.00. 377.00. 388.00

Mar. 2008 Future Price 372.30. 369.10

Sep.2008 Future Price 372.80. 370.20. 364.80

Mar.2009 Future Price. 370.70. 364.30. 376.70

Sep. 2009 Future Price. 364.20 376.50 388.20

Required:

1. Devise a hedging strategy for the company.

2. What is the impact of the strategy you propose on the price the company pays for copper

   in the future market? (3 marks)

3. What is the initial margin requirement in October 2007? Is the company subject to any

   margin calls?