Copper is one of the most influential physical commodities in the world. Because this metal is needed for almost all construction and manufacturing projects, the copper market is even used as a barometer to measure the health of the economy, often referred to as “Dr. Copper”.
Price fluctuations in the copper market are common and have been difficult to forecast in the past. This can present problems for both sellers and buyers of copper, as projects and profits are affected by price changes.
Hedging with futures
One way to offset the risk of adverse price movements is through hedging using derivatives, which allows you to protect yourself from unforeseen market events in the future. Derivatives, such as futures contracts, are financial instruments whose prices move in line with the prices of their underlying market. One such futures contract is COMEX Copper – which can be used as a price management tool to hedge your copper price exposure, protecting your profit margins and minimizing your risk.
Irrespective of what side of the equation you are on, buyers and sellers can benefit from using futures contracts. Normally, participants of a hedge strategy include the copper producers and a company that needs to purchase copper sometime in the near future.
In January, a manufacturer of copper wire receives an order that will not begin production until June. Upon receipt of the order, they can lock in their copper price now by purchasing the June Copper futures contract.
This offers protection from a potential price increase without immediately purchasing all the necessary copper and incurring extra storage costs.
In June, the manufacturer purchases the copper to fulfill the order, and subsequently sells the June Copper futures contract to close out the hedge. This hedge protected the manufacturer from an increase in price, thus preserving his profit margin.
It is important to note that by hedging, a company is trying to mitigate risk, NOT make additional profit through speculation. Therefore, if properly hedged, adverse and favorable price fluctuations will net the same result.
COMEX Copper futures are available to trade through your bank, broker, or electronically nearly 24 hours a day through CME Globex. The future is unknown and, Copper futures allows those involved in the purchase or sale of copper protection to manage their risk.
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