It is now September 2023. The company you work for anticipates that it will purchase 1 million pounds of copper in each in Feb 2024, August 2024, and Feb 2025. The company has decided to use the futures contract traded on the COMEX division of the New York Mercantile Exchange to hedge the risk. 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 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 wouldn't know the spot prices and futures prices at dates in the future until the actual date).a. Devise a hedging strategy for the company. What is the number of contracts that the firm will need tohave for each of the three future contracts (March 24, Sept 24 and March 25) at each delivery date (Feb24, Aug 24, and Feb 25) - would you have a short or long position at each date? Use the following assumptions to guide your answer:

Assume that the company plans to reevaluate its hedge at three points in time, 1) today Sept 2023, 2) Feb 2024 and 3) August 2024.

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 2024 it will close out the March 2024 contracts).

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.

b. After closing out the final position in Feb 2025 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).