Sparks Electrical has just won the contract to wire a new high rise office build

Question

Sparks Electrical has just won the contract to wire a new high rise office building to be built in Phoenix. The contract requires the purchase and installation of 1,125 thousand feet of copper wire. Fearing an impending increase in the price of copper wire, Sparks wants to hedge its contract by using the copper futures contract (25,000 pounds per copper futures contract). The estimated relationship between the stock price and the copper futures price is S($ value of the fund in thous) = a + b F($/pound) where b is 250. It is estimated that the price of copper wire increases by 400 cents per thousand feet for each one cent increase in the copper futures price. A properly constructed cross hedge is established by how many copper futures contracts? Can someone please help me? This is my last homework question and its due on midnight!

Explanation / Answer

Answer: Copper Future contract

=1125000/25000

=45 contracts

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