What is meant by rolling a hedge forward? A company anticipates that it will purchase 1 million pounds of copper in each of:
• February 2011
• August 2011
• February 2012
• August 2012 (Don’t calculate).
The company has decided to use the futures contract traded in the COMEX division of the CME group to hedge its risks. 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 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. Assume the market prices (in cents per pound) today and at future dates are as follows.
Date Oct 2010 Feb 2011 Aug 2011 Feb 2012 Aug 2012
Spot price $72.00 $69.00 $65.00 $77.00 $88.00
Mar 2011 futures price $72.30 $69.10
Sep 2011 futures price $72.80 $70.20 $64.80
Mar 2012 futures price $70.70 $64.30 $76.70
Sep 2012 futures price $64.20 $76.50 $88.20
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 2010?
Is the company subject to any margin calls?