Attempts: 9. Hedging strategy to protect against falling prices A Aa Price fluctuations in commodities can have signilficant conmequences for companies, especially if the fuctuation involves a prime raw material for a compaty. Different companies will adopt daferent strategins to manage the risik in prike 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 $3.75 per pound. The current market price for copper is $4.s0 per pound. The six-month futures price for copper is $1.69 per pound. At this selling price, the company can maintain its eamings growth. The company expects to produce 1,000,000 pounds of copper in this six months. (Note: Copper futures are traded at a standard size of 250,000 pounds.) If the company does not hedge the copper it produces, it can expect to ean a total revenue of end of six months. at the If Cranked coffee places a hedge on lts copper production in the futures market, would delivery In six months at a delivery price of 4.69 per pound to penerate profits that maintain its desired earnings growth. contracts for When the contract comes due in six months, the spot price of copper $319 per pound in the cash markets. Prices on the new six-month futures contracts in copper are 3 99 per pound Caulate the expected revenue in the following markets: Futures Market Cash Market Net gein or loss in the futures market Net gain or loss in the cash market 0 $3,990,000 O s1,500.000 O -s560,000 O -14.890,00so 0 3.990.poo The cost of production at copper is s 7so s0 Thus othe stuns manet ansd h the fytures market and n the cash market This gain and loss offiet each other, and the company benefits frot ascing the hedge This hedging strategy vicuid be referned toD hedge, and it Hels protict the proee to sell a commodity usenist aling prices Attempts: 9. Hedging strategy to protect against falling prices A Aa Price fluctuations in commodities can have signilficant conmequences for companies, especially if the fuctuation involves a prime raw material for a compaty. Different companies will adopt daferent strategins to manage the risik in prike 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 $3.75 per pound. The current market price for copper is $4.s0 per pound. The six-month futures price for copper is $1.69 per pound. At this selling price, the company can maintain its eamings growth. The company expects to produce 1,000,000 pounds of copper in this six months. (Note: Copper futures are traded at a standard size of 250,000 pounds.) If the company does not hedge the copper it produces, it can expect to ean a total revenue of end of six months. at the If Cranked coffee places a hedge on lts copper production in the futures market, would delivery In six months at a delivery price of 4.69 per pound to penerate profits that maintain its desired earnings growth. contracts for When the contract comes due in six months, the spot price of copper $319 per pound in the cash markets. Prices on the new six-month futures contracts in copper are 3 99 per pound Caulate the expected revenue in the following markets: Futures Market Cash Market Net gein or loss in the futures market Net gain or loss in the cash market 0 $3,990,000 O s1,500.000 O -s560,000 O -14.890,00so 0 3.990.poo The cost of production at copper is s 7so s0 Thus othe stuns manet ansd h the fytures market and n the cash market This gain and loss offiet each other, and the company benefits frot ascing the hedge This hedging strategy vicuid be referned toD hedge, and it Hels protict the proee to sell a commodity usenist aling prices