Question: QUESTION 2 (2 points each section, a total of 6 points): Today is March. You are a copper tubing manufacturer in Seattle. You plan to

QUESTION 2 (2 points each section, a total of 6 points):

QUESTION 2 (2 points each section, a total of 6 points): Today is March. You are a copper tubing manufacturer in Seattle. You plan to purchase 250,000 pounds of copper in May and want to hedge the price of copper. There are June futures contracts on 25,000 pounds of copper, deliverable in New York. You estimate the following regression for the hedging period: Changes in spot copper prices in Seattle = 1.20 x Changes in futures copper prices. (a) Design an optimal hedging strategy. (b) Now assume that by May both the spot and the futures prices rose by $1.20. What is the total gain/loss on the spot position (that is, the increase or decrease in the total cost of the purchase)? What is the total gain/loss on the futures position? What is the total gain/loss from closing the hedge and purchasing the cooper? Did the hedge work exactly as you expected? Explain (c) Now assume that by May the spot price rose by $1.20, but the futures price rose by $0.80. What is the total gain/loss on the spot position (that is, the change in the total cost of the purchase)? What is the total gain/loss on the futures position? What is the total gain/loss from closing the hedge and purchasing the cooper? Did the hedge work exactly as you expected? Explain

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