Refer to Table 23.1 in the text to answer this question. Suppose today is September 4, 2001, and your firm is a piping manufacturer that needs 100,000 pounds of copper in March for the upcoming production run. You would like to lock in your costs today, because you’re concerned that copper prices might go up between now and March.

a. How could you use copper futures contracts to hedge your risk exposure? What price would you be effectively locking in?

b. Suppose copper prices are $.76 per pound in March. What is the profit or loss on your futures position? Explain how your futures position has eliminated your exposure to price risk in the copper market.

Table 23.1

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GRAINS AND OILSEEDS LIFETIME OPEN HIGH LOW SETTLE CHANGE HIGH LOW Corn (CBT) 5,000 bu.: cents per bu. Sept 219 219 217 218 Nov Dec 232 226 225 226 225 - 1 232 229 231 - 1 1 3332 Mar May July Sept Dec 235 235 242 243 247 248 252 Sept Oct Slow 202 250 250 235 235 2412 243 Oct Dec Fb:02 Aar June 245 247 250 248 252 25114 FUTURES PRICES Tuesday, September 4, 2001 Open Interest Reflects Previous Trading Day. 249 253 253 253 Dc03 264 264 263% 2634 Est voll 57.000 vol Fri 57.959. open imt 357.192 +1.467. 22762 192 17.020 24215 199 1,213 275 2021 231,541 243 2270 443 213 205 56,806 266¹ 221 13,893 34 2791 22714 18.379 4252 233 272 2391 299 253¹ LIVESTOCK AND MEAT Cattle-Feeder (CME) 50,000 lbs.: cants per lb. 90.45 91.5 90.40 91.05 + 65 90.10 91.00 90.05 90.80 + 92.00 86.05 65 52.10 B8.05 90.40 91.00 90.30 91.00 + 52 52.30 86.40 90.25 90.47 90.15 90.45 + 15 31.50 86.45 89.50 89.95 89.50 89.95 + 15 50.80 88 40 10 91.15 88 30 Ja2 Mar Apr 89.40 89.90 89.40 89.90 + Est val 2290 vol Fri 3.523; apan int 15.306 -336. Cattle-Live (CME) 40,000 lbs.; cents per lb. 72.95 73.45 72.87 73.37 + 74.35 74.90 74.30 74.80 + 71.95 22 76.50 20 77.20 72 80 C7 77.57 73.32 C2 78.72 75.00 13 74.85 72.35 30 OPEN INT. 76.00 76.30 75.85 76.12 + 77.80 77.85 77.45 77.82 74.00 74.25 73.95 74.22 Aug 74.75 74.95 74.60 74.90 Est vol 11,381 vel Fri 15,531. open int 108.028. +1.296. 75.20 73 20 1.693 13.578 1,092 2.216 5.518 3.631 1,897 315 242 44.208 25.017 20.643 8.294 9.168 617 CURRENCY LIFETIME OPEN HIGH LOW SETTLE CHANGE HIGH LOW Japan Yen (CME)-12.5 million yen: $ per yen (.00) Sept De: Est val 20,253 vo Fri 24.548 open in 114653 183. INTEREST RATE Treasury Bonds (CBT)-$100,000; pts 32nds of 100% Sept 106-02 103-04 104-13 134-14 Dec 105-13 105-13 103-18 ¹03-22 Est vol 380 000; vol Fri 189.391 open in 546016.-9.802. Sepi Ocl NCA 8413 8441 8367 5381 0061 9950 7983 110.933 8478 8512 8440 8453 0049 9880 8060 3.379 Dec Ja02 Feb METALS AND PETROLEUM Copper-High (Cmx.Div.NYM)-25,000 lbs.; cents per lb. 65.00 65 45 64.95 65.15 0.05 93.00 64.95 65.25 65.50 65.20 65.15 0.10 92 40 65.20 65.50 65 50 65.50 65.35 55.80 66.20 65.40 65.70 56.15 66.15 65.15 66.05 0.10 91.75 65.50 0.10 92.00 65.40 0.10 90.80 66.15 0.10 90.00 66.50 Mar May July n.a. 66.50 65.50 66.40 - 66.75 67.10 65.75 26.75 0.10 91.00 66.75 57.30 67.60 67.20 67.30 - 0.10 83.60 67.20 58.00 68.30 60.00 67.80 - 0.10 3.90 68.00 68.30 68.90 68.40 38.25 0.10 89.00 68.40 68.80 68.90 68.70 68.70 0.10 63.00 68.70 Est val 11,000. val Fri 11.905: open int 90.278. +475 Gold (Cmx.Dlv.NYM)-100 troy oz. $ per troy oz. 271.80 Sept M Dec Sept 1.50 275.6 Cel 273.10 273.10 271.10 272.30 Dec 275.00 275 80 272.70 273.70 27500 275.00 274 30 27450 267.00 1.50 300.00 260.00 1.40 429.50 260.00 Fh02 140 2950 260 97 OPEN INT. 11 5: 106-25 96-22 148.952 $2 105-25 97-25 392,936 5.547 6.857 2.612 49,711 1.691 1.159 7.826 3.106 2.626 1.557 3176 10.022 84.607 9532