Problem 3.32. 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 2016, and August 2016. The company has decided to use the futures contracts traded in the COMEX division of the CME Group 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 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. Devise a hedging strategy for the company. (Do not make the tailing adjustment described in Section 3.4.) Assume the market prices (in cents per pound) today and at future dates are as follows. 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? Aug 2015 Aug 2016 Feb 2016 377.00 365.00 388.00 Date Spot Price Mar 2015 Futures Price Sep 2015 Futures Price Mar 2016 Futures Price Sep 2016 Futures Price Oct 2014 372.00 372.30 372.80 Feb 2015 369.00 369.10 370.20 370.70 364.80 364.30 364.20 376.70 376.50 388.20 Problem 3.32. 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 2016, and August 2016. The company has decided to use the futures contracts traded in the COMEX division of the CME Group 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 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. Devise a hedging strategy for the company. (Do not make the tailing adjustment described in Section 3.4.) Assume the market prices (in cents per pound) today and at future dates are as follows. 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? Aug 2015 Aug 2016 Feb 2016 377.00 365.00 388.00 Date Spot Price Mar 2015 Futures Price Sep 2015 Futures Price Mar 2016 Futures Price Sep 2016 Futures Price Oct 2014 372.00 372.30 372.80 Feb 2015 369.00 369.10 370.20 370.70 364.80 364.30 364.20 376.70 376.50 388.20
