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It is now October 2014. A company anticipates that it will purchase 1 million pounds of copper in each of February 2015, August 2015, February

It is now October 2014. A company anticipates that it will purchase 1 million pounds of copper in each of February 2015, August 2015, February of 2016, and August 2016. The company has decided to use futures contracts traded in the COMEX division of the New York Mercantile Exchange 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 companys policy is to hedge 80% of its exposure. Contracts with maturities up to 13 months into the future are considered to have sufficient liquidity to meet the companys needs. Devise a hedging strategy for the company.

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

Date

Oct 2014

Feb 2015

Aug 2015

Feb 2016

Aug 2016

Spot Price

72.00

69.00

65.00

77.00

88.00

Mar.2015 future price

72.30

69.10

Sep.2015 futures price

72.80

70.20

64.80

Mar.2016 futures price

70.70

64.30

76.70

Sep.2016 futures price

64.20

76.50

88.20

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 2014? Is the company subject to any margin calls?

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