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Price fluctuations in commodities affect companies, especially if the fluctuation involves a prime raw material for a company. Different companies adopt different strategies to manage the risk in price fluctuations, such as timing the purchase of the commodity, maintaining a certain level of inventory, and hedging. Consider the case of Tolbotics Copper Inc., a large copper-producing company. The company's cost of producing copper is about $3.85 per pound. The current market price for copper is $4.62 per pound. The six-month futures price for copper is $4.81 per pound. At this selling price, the company can maintain its earnings growth. The company expects to produce 750,000 pounds of copper in this six months. (Note: Copper futures are traded at a standard size of 250,000 pounds.) If the company does hedge the copper it produces, it can expect to earn a total revenue of $3,607,500 at the end of six months. If Tolbotics places a hedge on its copper production in the futures market, it would contracts for delivery in six months at a delivery price of $4.81 per pound to generate profits that maintain its desired earnings groy sell 750 sell 3 buy 750 buy 3 When the contract comes due in six months, the spot price of copper is $3.27 per pound in the cash markets. Calculate the expected revenue in the following markets: Futures Market Cash Market Net gain or loss in the futures market: Revenue received in the cash market: O 0 O O $2,452,500 $3,067,500 $3,607,500 -$435,000 -$435,000 $285,000 $540,000 -$3,067,500 The cost of production of copper is $2,887,500. Although copper prices have decreased, Tolbotics has still made a profit of $720,000 because of the gain on its copper futures contracts. This hedging strategy would be referred to as a hedge, and it helps protect the producer to sell a commodity against falling prices