1. It is now September 2021 . The company you work for anticipates that it will purchase 1 million pounds of copper in each in Feb 2022, August 2022, and Feb 2023. 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).
   1. Devise a hedging strategy for the company. What is the number of number of each contract that the firm will need have for each of the three future contracts (March 22, Sept 22 and March 23) at each delivery date (Feb 22, Aug 22, and Feb 23) - would you have a short or long position at each date? Use the following assumptions to guide your answer: (10 points)

• Assume that the company plans to reevaluate its hedge at three points in time, 1) today Sept 2021, 2) Feb 2022 and 3) August 2022.
• Its goal is to hedge all three spot purchases starting today, and keep a hedge in place for each date until the spot purchase actually occurs.
• The company plans to close out any futures contracts in the month prior to their expiration (for example, in Feb 2022 it will close out the March 2022 position).
• Assume that the company policy is to use the futures contract closest to its anticipated spot purchase, once a contract is available 13 months prior to the anticipated spot price). If the contract is not available, it uses a contract that allows it to roll over the hedge when a contract 13 months prior to the spot date is available.

2. After closing out the final position in Feb 2023 you are asked to evaluate the effectiveness of the hedging strategy. Given the prices in the following table, what is the impact of the strategy you propose on the effective price the company paid for copper? (calculate an effective price per pound for each delivery date). 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 (you did not know the spot prices at the time of your hedge and only found out the futures prices at each date when you reevaluated the hedges). (10 points)

	DATE
	Sept 2021	Feb 2022	Aug 2022	Feb 2023
Spot Price	72.00	69.00	65.00	77.00
March 2022 Futures Price	72.30	69.10	Not Available	Not Available
Sept 2022 Futures Price	72.80	70.20	64.80	Not Available
March 2023 Futures Price	Not Available	70.70	64.30	76.70

3. What is the initial margin requirement in Sept 2021 for all of your contracts? Given your strategy and the spot prices below, do you think the company would have been 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)? ( 5 extra credit/ bonus points the HW total is out of 45-but there are 50 points possible!)