Problem 3.1. It is now February 2020. A company anticipates that it will purchase 1 million pounds of copper in each of June 2020, December 2020, June 2021, and December 2021. The company has decided to use the futures contracts traded by the CME Group to hedge its risk. One contract is for the delivery of 25,000 pounds of copper. The initial margin is $2,700 per contract and the maintenance margin is $2,025 per contract. The company's 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 company's needs. (a) Devise a hedging strategy for the company. Do not make the adjustment for daily settlement (tailing the hedge) described in the textbook. Assume the market prices (in cents per pound) today and at future dates are as in the following table. (6) What is the impact of the strategy you propose on the price the company pays for copper? (c) What is the initial margin requirement in February 2020? (d) Is the company subject to any margin calls? Price / Date Spot Jul 2020 Futures Price Jan 2021 Futures Price Jul 2021 Futures Price Jan 2022 Futures Price Feb 2020 251.2 251.5 252 Dec 2020 Jun 2021 Dec 2021 245 255 264 Jun 2020 248 248.1 248.6 249 244.9 244.6 244.5 255.2 255.5 264.1 Problem 3.1. It is now February 2020. A company anticipates that it will purchase 1 million pounds of copper in each of June 2020, December 2020, June 2021, and December 2021. The company has decided to use the futures contracts traded by the CME Group to hedge its risk. One contract is for the delivery of 25,000 pounds of copper. The initial margin is $2,700 per contract and the maintenance margin is $2,025 per contract. The company's 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 company's needs. (a) Devise a hedging strategy for the company. Do not make the adjustment for daily settlement (tailing the hedge) described in the textbook. Assume the market prices (in cents per pound) today and at future dates are as in the following table. (6) What is the impact of the strategy you propose on the price the company pays for copper? (c) What is the initial margin requirement in February 2020? (d) Is the company subject to any margin calls? Price / Date Spot Jul 2020 Futures Price Jan 2021 Futures Price Jul 2021 Futures Price Jan 2022 Futures Price Feb 2020 251.2 251.5 252 Dec 2020 Jun 2021 Dec 2021 245 255 264 Jun 2020 248 248.1 248.6 249 244.9 244.6 244.5 255.2 255.5 264.1
