How companies can hedge commodity costs with futures

This illustrates how a company which depends on copper as an input (e.g., a computer maker) can use copper futures contracts to hedge its exposure (the anticipation of copper spot price increases).

Category:

Education

Tags:

• Finance
• derivatives
• hedge
• commodity

[800382914]

hi bionicturtle, can you also post video on how an increase in interest rate actually increases the value of the American Call and European Call Option while on the other hand it decreases the value of American/European put option.

It really helps.

[bionicturtledotcom]

yes, i sure will because i have a few posts upcoming in regard to option pricing models. Thanks for the request!

[800382914]

Why is it when you change the MAY 09 Spot Price , the May 09 Future Price also changes to the same value ?

Are they meant to be always be the same ?

Can it be different ? (eq. if change to may09 spot price to $5 , the may09 future price alternatively changes to $4.90 ?)

[bionicturtledotcom]

good question. On technical grounds (supply/demand), you are right, the futures price can vary. But on fundamental grounds, with shorter maturity, the futures price will move just about 1:1 (i.e., the delta of a futures is EXP[rt] which is near to 1.0). So, it's a safe place to start. Thanks, David

[damien3184]

Hi ! Suppose I have: Buying: 200T - supplier A (index LME) : 100T = risk - supplier B (flat rate) : 100T = no risk Selling: 200T - client A (index LME): 100T = no risk - client B (Flat rate): 50T = risk - client C (Pass trhough): 50T = no risk How many Tn are "at risk" ? Risk = 100 - 150 = - 50, so 0 Tn at risk ??? Thanks a lot !!!

[ello008]

For the long hedge, don't the close their position before delivery of the copper, to realize the gain on the contract? So in order to close their position, they would short, (i.e. sell a copper future contract) and recognize the gain, or loss, and then purchase copper at the spot.

[800382914]

hello bionicturtle,

Enquiry on your video and your excelwork , why is it that when you change the price in may 09 , it also change the future price of may 09. however can the prices be different ?