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Business, 16.03.2020 20:19 youngboymark123

Suppose you have $8,000 to invest in the copper market. To leverage your exposure to this market, you want to buy as many one-year copper futures contracts as you can afford based on the margin requirement. Copper is selling at $3 a pound and the margin requirement for a futures contract for 25,000 pounds of copper is $8,000. Instructions: Round to the nearest whole number for quantities, to the nearest tenth for percentages (1 decimal place), and to the nearest whole number for dollar amounts. a. Calculate your return if copper prices rise to $3.10 a pound. With $8,000, you can afford to purchase copper futures contract(s). At $3 a pound, this is worth $ . The contract specifies that you will take delivery of 25,000 pounds at $ a pound in one-year’s time. If the price in the market has risen to $3.10 by then, you make a profit of $ on the $ margin you posted. This represents a return of % on your investment. b. How does this compare with the return you would have made if you had simply purchased $8,000 worth of copper and sold it a year later? If you purchased copper directly at $3 a pound, you could have afforded pounds. If you sold it one year later for $3.10, you would have gained $ , a return of %. c. Compare the risk involved in each of these strategies. Speculating in the futures market can bring high returns but, as usual, these high returns come at the cost of bearing greater risk. Suppose, for example, your hunch about copper prices was incorrect and the price of copper fell to $2.90. You would have lost $ over the year. In comparison, if you bought the copper at $3 and after a year you sold it at $2.90, you would have lost only $ .

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