Question

your company is a copper producer, and you just signed a contract to sell 1 million pounds of copper for the market price in December of this year. You enter a short position on 40 December futures contracts (copper futures contracts are 25000 pounds) at a price of $2.67 per pound.

What happens if copper is $4.50 per pound on the day of sale?

what happens if it is $1.50?

Answer 1

value of futures contact , v = no. of contracts * price per pound*25000 = 40*2.67*25000 = $2,670,000

a)

if on the day of sale , price of copper , p = $4.50

value of the contact , v2 = p*1 million pounds = 4.5 *1 million = 4.5 million = $4,500,000

there will be loss for the company

loss = v2 - v = 4,500,000 - 2,670,000 = $1,830,000

b)

if on the day of sale , price of copper , p = $1.50

value of the contact , v2 = p*1 million pounds = 1.5 *1 million = 1.5 million = $1,500,000

the company will profit from futures contract

profit = v - v2 =2,670,000 - 1,500,000= $1,170,000