12. Eastmark Electrical Equipment Manufacturers needs to secure its supply of co
ID: 2615659 • Letter: 1
Question
12. Eastmark Electrical Equipment Manufacturers needs to secure its supply of copper for the next year. The price of copper is extremely volatile because of huge month-to-month variation in demand. Eastmark wants to break even with a hedge against future copper prices. Currently, the market price for copper is reasonably low at $2.50 per pound or $250 (CWT) Eastmark has entered into a contract with the supplier for 600,000 pounds of copper per month starting in January at market prices. Eastmark has also entered into a futures contract with a financial institution for 600,000 pounds per month at $2.50 per pound. CWT (hundredweight) is equal to 100 pounds in the United States. Suppose the futures contact is still in force in February a. However, assume the firm has just lost a key client's business and only purchases 500,000 pounds of copper i. Calculate the one month financial and the physical results if the market price of copper has risen to $3.75 per pound Calculate only the financial impact of copper transactions and disregard the loss of revenue due to business loss The financial result is $ . (Enter your response as a whole number and include a minus sign if necessary.) The physical result is $ (Enter your response as a whole number and include a minus sign if necessary.) ii. Calculate the one month financial and the physical results if the market price of copper, instead, has fallen to $1.50 per pound. Calculate only the financial impact of copper transactions and disregard the loss of revenue due to business loss The financial result is $ . (Enter your response as a whole number and include a minus sign if necessary.) The physical result is $ (Enter your response as a whole number and include a minus sign if necessary.) b. Now assume the firm has just received a new client's business and must purchase 700,000 pounds of copper. i. Calculate the one month financial and the physical results if the market price of copper has risen to $3.75 per pound Calculate only the financial impact of copper transactions and disregard the loss of revenue due to business loss The financial result is $ (Enter your response as a whole number and include a minus sign if necessary.) The physical result is $ (Enter your response as a whole number and include a minus sign if necessary.) ii. Calculate the one month financial and the physical results if the market price of copper, instead, has fallen to $1.50 per pound. Calculate only the financial impact of copper transactions and disregard the loss of revenue due to business loss The financial result is $ (Enter your response as a whole number and include a minus sign if necessary.) The physical result is $ . (Enter your response as a whole number and include a minus sign if necessary.)Explanation / Answer
a) i). Financial result:- P/L in copper futures’ position + P/L loss in copper actual trading. Since , we are long in 600,000 of January copper futures @ 2.50 and at the end of the month the price is 3.75, so the profit in futures’ position is 600,000*(3.75-2.5) = $ 750,000. And, in actual trade, we could have purchased copper @2.50 per pound and quantity would be 600,000 but at the end of the month, we have to purchase @ 3.75 per pound. Even though the quantity is low, our loss is (600,000*2.5) - (500,000*3.75) = -375,000. Net financial result is 750,000 - 375,000 = $375,000 profit.
Physical result:- physical result is P/L on physical trade of copper which is as calculated in above situation 600,000*2.5) - (500,000*3.75) = -375,000. A loss of $375,000.
ii) if market price of copper falls to 1.5 per pound, then
Financial result:- P/L in copper futures’ position + P/L loss in copper actual trading. In futures’ position, we are long 600,000 pounds @2.5 and price falls to 1.50 by the end of he month. So our loss is 600,000*(1.50-2.50) = -600,000 USD. In actual physical trade, there is a profit since the price has dropped. And this profit is equal to (600,000*2.5) - (500,000*1.5) = $750,000. In net, our P/L is +750,000 - 600,000 = a profit of $ 150,000.
Physical result:- P/L on actual physical trade on copper. (600,000*2.5) - (500,000*1.5) = $750,000 Profit.
b) i) if in actuality, we have to purchase 700,000 instead of 600,000 as agreed upon earlier and price rises to 3.75 against 2.5 per pound. Then,
Financial result:- P/L in futures position + P/L on actual trade. {600,000*(3.75 - 2.5)} + {(600,000*2.5) - (700,000*3.75)} = 750,000 - 1,125,000 = - 375,000. A loss of $375,000.
Physical result:- P/L on physical trade.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.