Currency and commodity price risk. Metallgesellschaft (MG), a leading German metal processor, has scheduled the delivery of 20,000 metric tons of copper for August 10, 2013, to Quelle, a German distributor of industrial supplies. On May 10, 2013, copper is quoted at 4,821 pounds sterling (£) per metric ton for immediate delivery and at £4,838 per metric ton for delivery on August 10, 2013, on the London Metal Exchange (LME) or in Hamburg (Germany). Monthly storage cost will run at £7 for a metric ton in London and 15 euros (€) in Hamburg, payable on the first day of storage.

Exchange rate quotations are as follows: The pound sterling is worth €1.25 on May 10 and is selling at a 2. 8 percent annual discount. The opportunity cost of capital for Metallgesellschaft is estimated at 6 percent annually, and the pound sterling is expected to depreciate at a yearly rate of 2. 8 percent throughout the next 12 months.

a. What is the nature of price risk(s) facing MG in procuring 20,000 metric tons of copper from the LME?

b. Compute the euro cost on May 10, 2013, for Metallgesellschaft of the following options:

■ Buy 20,000 metric tons of copper on May 10 and store it in London until August 10.

■ Buy a forward contract of 20,000 metric tons on May 10, 2010, for delivery in three months. Cover sterling payable by purchasing forward pounds sterling on May 10, 2010.

■ Buy 20,000 metric tons of copper on August 10, 2010.

c. Can you identify other options available to Metallgesellschaft? Which one would you recommend?