Question: Table 3 is relevant to answer both parts (a) and (b) of this question. Your team has the responsibility of managing the commodity price risk
Table 3 is relevant to answer both parts (a) and (b) of this question.
Your team has the responsibility of managing the commodity price risk for a client (QEPA) (no consideration for the foreign exchange risk is required). Your team has adopted an active management of this risk. Today is 15thSeptember 2005. QEPA has just notified you of their intention to sell 10,000 tonnes of USD priced copper on 15thJune 2006. Table 3 below shows the copper prices on different dates.
Table 3
Maturity
Commodity Prices
Copper/tonne
On 15thSeptember 2005
On 15thDecember 2005
Spot Rate (Call)
US$2,195/2,200
US$2,390/2,395
3 months
US$2,220/2,225
US$2,415/2,420
6 months
US$2,204/2,209
US$2,399/2,404
9 months
US$2,192/2,197
US$2,387/2,392
12 months
US$2,169/2,174
US$2,364/2,369
a.[3 marks]Assume you have received economic advice that suggests adropin the copper price on 15thJune 2006. Outline your hedging strategytodayfor the copper price risk. That is, clearly explain whether you hedge by entering a forward contract or not. If you determine to enter a forward contract, you need to clearly specify whether you long or short the contract and at what price per tonne. If you determine not to enter a forward contract, you need to clearly explain why.
Now ignore part (a) and assume that 3 months have passed and today is 15thDecember 2005. Also assume that on 15thSeptember 2005 yousold10,000 tonnes of copper forward with the maturity being 15thJune 2006. However, QEPA has just advised that the date of selling the 10,000 tonnes of copper has been moved forward. That is, the new transaction date is 15thMarch 2006 (old transaction date is 15thJune 2006). The economic advice now suggests anincreasein the copper price on 15thMarch 2006.
b.[5 marks]Show your hedging strategytodayfor the copper price risk by filling in anappropriate numberof deal slips given on next page (i.e. depending on your strategy, you can fill in zero, one, two or more deal slips). Simply fill in the deal slip(s), no explanation is required.
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