It is now October 2016 . A company anticipates that it will purchase 1 million pounds of copper in each in Feb 2017, August 2017, and Feb 2018. The company has decided to use the futures contract traded on the COMEX division of the New York Mercantile Exchange to hedge the risk. One contract is for 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 exposures. Contracts with a maturity up to 13 months into the future are considered to have sufficient liquidity to meet the companys needs (Note the prices you have allow you to devise an optimal strategy, in reality you would not know the spot prices and futures prices at dates in the future until the actual date).

a) Devise a hedging strategy for the company. Illustrate the impact of the hedging strategy during the time under consideration. Assume the market prices (in cents per pound) at future dates are as follows (assume you do not know the spot prices at the time of your hedge).

b) What is the impact of the strategy you propose on the effective price the company pays for copper?

c) What is the initial margin requirement in October 2016? Given your strategy and the spot prices below, do you think the company subject to any margin calls during the life of the hedge (you do not need to calculate the margin call just look at each time period and see if you would have had a large enough cumulative loss for a margin call)?

Date	Oct 2016	Feb 2017	Aug 2017	Feb 2018
Spot Price	72.00	69.00	65.00	77.00
March 2016 Futures Price	72.30	69.10
Sept 2016 Futures Price	72.80	70.20	64.80
March 2017 Futures Price		70.70	64.30	76.70