In May 2021, a solar panel manufacturer agreed to sell its panels at a fixed price. It,

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Question:

In May 2021, a solar panel manufacturer agreed to sell its panels at a fixed price. It, therefore, plans to buy 50,000 pounds of copper in August 2021. The current spot price of copper is $4.70 per pound and the current futures price for the delivery of 25,000 pounds of copper during September 2021 is $4.60 per pound. The company decides to hedge its risk with copper futures. Assume that in August 2021, it goes ahead and buys in the spot market at $4.00 per pound and closes out its futures position at a futures price of $3.90 per pound.

Answer ALL of the following questions:

Describe the natural position of the company with respect to the market price of copper.
What is the effective purchase cost inclusive of the futures payoff?
If competitors do not hedge, in your opinion, is this a risky strategy? What other type of hedge strategy could the company have used to insure against an adverse movement in copper prices?