6. Hedging strategy to protect against falling prices Aa Aa Price fluctuations in commodities can have significant consequences for companies, especially if the fluctuation involves a prime raw material for a company. Different companies will adopt different strategies to manage the risk in price fluctuations, including adjusting the timing of their commodity purchases, maintaining a safety stock of their raw materials, and hedging. Consider the case of Cranked Coffee Company, a large copper-producing company: The company's cost of producing copper is about $3.40 per pound. The current market price for copper is $4.08 per pound. The six-month futures price for copper is $4.25 per pound. At this selling price, the company can maintain its earnings growth. The company expects to produce 1,250,000 pounds of copper in this six months. (Note: Copper futures are traded at a standard size of 250,000 pounds.) $5,100,000 at the If the company does not hedge the copper it produces, it can expect to earn a total revenue of end of six months. If Cranked Coffee places a hedge on its copper production in the futures market, it wouldbuy 1250 contracts for delivery in six months at a delivery price of $4.25 per pound to generate profits that maintain its desired earnings growth