Question: A construction company uses a large quantity of copper as raw material. She fears That copper prices will increase over the next three months. On the other side of the street, a copper producer believes That the copper market will be flooded by Indonesia, the 2nd largest producer in the world, and would like to know the price of copper in the coming months. At present, 5000 ounces of Copper at $ 700.
A) What are the strategies to be adopted by the construction company and by the Copper producer, if they want to cover themselves with a future? Justify your answer using (Specify basic positions, positions to be taken and Graph the net results after coverage. Make sure of your Axes.)
B) Suppose that they agree (producer and user of copper) on a futures contract for a quantity of 3,000,000 ounces and the transaction price is $ 700 (F0) Per 5,000 ounces with delivery within 3 months. If the price per 5,000 ounces of copper in 3 month is $ 712, what are the results (gains or losses) of the strategies adopted in a)? Justify your answer using detailed calculations.
C) Propose an alternative strategy to cover the risk of loss for the producer and the user of the Copper, but this time using Options. Justify your answers using graphics. (Specify the basic positions, positions to be taken in options and show the Net results after hedging. Make sure you define the axes correctly)