7244AFE Derivatives & Risk Management: Risk Analysis Report for Copper

This report provides a comprehensive risk analysis for Elite Copper Corporation, addressing the volatility of copper prices and offering strategies for risk management. The report explores the use of futures contracts to hedge against price fluctuations, determining the optimal hedge ratio and comparing spot and futures prices over a five-year period. It calculates the company's exposure, the number of contracts needed in the derivative market, and the margin requirements. Furthermore, the report identifies the major risks faced by Elite Copper beyond price changes, including factors influencing copper extraction and market dynamics, providing a detailed consulting report for the client's risk mitigation strategies. The report is a response to a take-home assignment for the course 7244AFE Derivatives & Risk Management.

Elite Copper Corporation
Risk Analysis Report
NAME OF STUDENT
risk net

Contents
Executive Summary...................................................................................................................2
Introduction................................................................................................................................3
Issues..........................................................................................................................................4
Conclusions..............................................................................................................................10
References................................................................................................................................11

Executive Summary
This assignment talks about the derivative contract that we should choose especially in case
of commodity derivative. So, this assignment has got a commodity name copper, for which
prices are fluctuating and the hedger wants to hedge the complete risk and asks us in which
type of contract he should fall. (Kampf, 2013) Prospects contract executed in item exchanges
can be physically settled upon contract advancement or is cash settled (as instructed by the
commodity exchange). The outcome structure is straight concerning the market cost at the
time of settlement. (TOWN, 2016) Supporting the commodity worth peril using exchange
traded auxiliary contracts will all in all cut down the cost of supporting as diverged from
undertaking an over-the counter auxiliary contract for the inspiration driving supporting –
especially where the traded subordinate contract is significantly liquid. (Petry, 2014) This is,
as it were, credited to the lower spreads on the referred to subordinate costs when appeared
differently in relation to the over-the counter promotes which don't require any additional
trade (again as done on the over-the-counter grandstand) and the certifiable cost is
fundamentally credited to margin upkeep. (Y, 2016) This is fundamental for those
associations that don't have the significant ability to pass on the costs of thing worth change
and supports on to the customer – due to contention in addition, other market loads. (Cooper,
2017) (Henderson & Hobson, 2010)

Introduction
This report will talk about the- risk involve in the commodity market especially copper in the
present case. How to handle the fluctuations in the price of copper. How to hedge, what to
hedge. Below is the introduction to commodity risk management.
Item worth risk is the money related danger on a component's cash related execution/ profit
upon instabilities in the expenses of things that are out of the control of the substance since
they are basically dictated by external market powers. Sharp fluctuations in commodity
expenses are making tremendous business challenges that can impact creation costs, thing
esteeming, benefit and credit availability. This worth precariousness makes it fundamental for
a substance to manage the impact of item worth changes over its value chain to effectively
manage its cash related execution and profitability. The fundamental establishments of item
chance organization come back to the out of date events. Business trades in the early
grandstands routinely incorporated an arrangement understanding between two parties that
were now and again composed as a forward contract with various features/choices on the
comprehension.
The understanding could vary from openly sorted out between two social occasions to a
formal and approved understanding based on developed rules and even law. Certain terms
and conditions of such understandings are there in the future contract. A comprehension for a
future arrangement would usually have a course of action that would permit the purchaser to
decay transport if the passed-on items were seen to be of lacking quality exactly when
appeared differently in relation to the principal model. (Hanisch, 2019)As reflected in notarial
contradictions expanding back to old-fashioned events, logical inconsistency over what
included adequate transport was a commonplace occasion. (Elfarhani, Mkaddem, Rubaiee,
Jarraya & Haddar, 2019) Both these upgrades are by and large related with the extending
centralization of business development, from the outset at the colossal medieval market fairs
and, later, on the bourses and exchanges. (Chan, Jacobi & Zhu, 2019) Securitization of mass
commodity trades was supported by applying trading methods that had been being utilized
for a serious in length time in the exhibit for bills of exchange. (Fu, Tang & Chen, 2019)

Issues
Issue 1: In the present case Elite copper is facing issues related to the prices of the copper
which is fluctuating. There annual production is about 12 kilo tonnes. As the price is Volatile,
we will be using future contact to hedge the risk.
Response 1: The merchant of the futures contract (the gathering with a short position)
consents to offer the hidden item to the purchaser at termination at the fixed deals cost. Over
the long haul, the agreement's value changes with respect to the fixed cost at which the
exchange was started. This makes benefits or misfortunes for the broker. (Oktavia, Siregar,
Wardhani & Rahayu, 2019)
The company should sell futures, if the company is sure that the prices of the copper will fall
in future. As by selling the future, the company will save itself from the risk of the FUTUREs
index being falling. (Hung, 2019) (Panda, Nanda & Paital, 2019)
Issue 2: This question asks us about the optimal hedge ratio. A hedge ratio is the proportion
of introduction to a supporting instrument to the estimation of the supported resource. A
proportion of 1 or 100% implies that the position is completely supported and a proportion of
0 methods it isn't supported in any way. Hedge ratio is a significant measurement in hazard
the executives since it discloses to us the degree to which the danger of any unfriendly
development in our advantage or risk will be met by any counterbalancing development in
the supporting instrument. The fence proportion changes because of changes in estimation of
the supporting instrument as well as the supported resource or risk.
Response 2: As the change in the market price of copper is very volatile, we should fully
hedge the risk in order to avoid the variations in prices of copper. So, the optimal hedge ratio
should be 100%.
An optimal hedge ratio (likewise called least difference support proportion) is a ratio that tells
utilize the level of our benefit or risk presentation that we should support. (Ramachandran,
Lengnick-Hall & Badrinarayanan, 2019).It rises to the result of the relationship between the
costs of the supporting instrument and the supported instrument and the instability of the
supported instrument isolated by the unpredictability of the supporting instrument. An ideal

fence proportion is most important where the qualities of the supported instrument and the
supporting instrument are diverse for example in a cross support. (Park, Chung & Kwon,
2018) (Ramlall, 2018)
Issue 3: It is asking us to draw a chart for 5 year between the spot price and future price of
copper. As both the price are different. We got the know the difference between the two.
Response 3: As you see in 2013, spot price is around $4000 and the future price is around
$4500. The futures prices are different from the spot prices. As convenience yield is
involved, interest is also involved and dividend is also involved while calculating the prices.
As you see in 2017, the spot price has taken a significant jump, as due to time value of
money, future price in 2017 is a little higher because cost of interest savings is also added in
futures price as you have to keep only margin amount to trade in them.
As you see the graph. This price is changing for a commodity. As convenience yield is
involved, interest is also involved and dividend is also involved while calculating the prices.
The principle contrasts between the spot and futures price are the cost and date of delivery. A
commodity spot price is the cost at which the commodity could be exchanged at some
random time in the commercial centre. Interestingly, an item's Futures cost is the cost of the
spot in connection to its present spot value, time until conveyance, chance free loan fee and
capacity costs at a future date. The premise is the variety between the spot cost of a
deliverable item and the overall cost of the Futures contract for the equivalent real that has
the briefest span until development. Premise is a pivotal idea for portfolio chiefs and dealers
since this connection among money and prospects costs influences the estimation of the
agreements utilized in supporting. As there are holes among spot and relative cost until the
expiry of the closest contract, the premise isn't really precise. Notwithstanding the deviations
made in light of the time hole between the expiry of the prospects contract and the spot, item
quality, area of conveyance and the actuals may likewise change. By and large, the premise is
utilized by speculators to check the benefit of conveyance of money or the real and is
likewise used to look for exchange openings. (Rendtorff, 2019) (Sobczyk, Radzik & Radwan-
Pragłowska, 2019)

Issue 4:
It is asking us about the exposure of the copper. That simply means how much risk are we
carrying.
Reponses 4: As we are taking future contract for the full 12Killo Tone. Our exposure will be
accordingly according to the futures prices. Let say the futures price is 5825USD/MT. Then
our exposure will be 5825 * 12 = 69,900 USD.
As we are selling futures, as we have a fear that falling prices of future will generate us
income. So, we are totally hedged as, if the prices rise than we will be able to generate the
profit by selling the copper and compensate the loss by the extra profit that we are going to
earn.
There are two fundamental members in the prospect’s markets: hedgers are trying to deal
with their value hazard for items, and examiners need to benefit off of value variances for
commoditys. Examiners give a lot of liquidity to the prospect’s markets. Futures contracts
enable theorists to go out on a limb with less capital because of the high level of influence
included.
2012 2013 2014 2015 2016 2017
0
1000
2000
3000
4000
5000
6000
7000
Spot and Futures Price
Spot
Futures
Price in $

Prospects contracts are monetary subordinates with qualities dependent on a fundamental
resource. They are exchanged on concentrated trades, for example, the CME Group or the
ICE Exchange. (Sobczyk, Radzik & Radwan-Pragłowska, 2019)
The prospects market started during the 1850s in Chicago with ranchers trying to fence their
harvest generation. Ranchers could sell Futures contracts to secure a cost for their yields. This
enabled them to be unconcerned about day by day value variances of the spot cost. The
Futures market has since extended to incorporate different wares, for example, vitality
prospects, loan cost Futures, and money Futures.
Issue 5: The questions is asking us about how many contracts we need to need enter in the
derivative market as there is a difference in the spot price and futures price.
Response 5: In order to calculate that we need to know the current spot price of the copper,
the futures price of copper and the size of once contract in the derivate market.
(Vahdatmanesh & Firouzi, 2018)
Spot Price of Copper: 5780
Future Price of Copper: 6670
Size of one Contract: 5000USD
Contracts to be executed = (12*5780*1000)/5000*5625 = 2.5 Contracts are required to be
entered.
Issue 6: The questions ask us about the margin requirement for the contract.
Response 6: So as per the website the initial margin requirement is 25% and maintenance
margin is 2700 USD per contract.
Initial margin will be 2.5*5000*25% = 3125 USD.
Issue 7: It talks about the major risks faced by Elite Copper apart from the risk arising from
the price change in copper
Response 7: The high pace of overall copper use requires a strange condition of advancing
age. Profitable extraction depends upon a huge number of components: government appraisal
rates and rules, swelling levels, work remuneration rates, fruitful organization of copper
extraction and creation firms, and financially savvy mining procedures. There are also trading
thoughts consolidated with copper costs. Copper prospects help deal with the way for future

endeavours, adventure progression and the number of firms in the copper business. The
development of adaptable speculations with a thing focus can truly construct transient
precariousness at copper costs through colossal purchases or arrangements. (Yadav, Pandey,
Shukla & Kumar, 2019)
It is hard to see most of the variables that effect the expense of any all around traded item.
Notwithstanding whether that were possible, it would be impressively progressively difficult
to measure these components appropriately. Henceforth, copper scholars have an effect in
driving business division costs reliant on the best suppositions of the present business
visionaries. Copper has its own ticker picture in the things promote (EHG). Like most
mechanical or provincial items, dealers should think about a colossal number of
macroeconomic components that effect copper esteem improvements, which consolidate the
expense of elective base metals, for instance, aluminium, nickel, lead and iron. Rising copper
costs during the focal point of the 2000s at last provoked pushed livelihoods of aluminium as
a substitute in power joins, electrical apparatus and refrigeration tubes. Systematic elements,
for instance, the atmosphere or time, can impact copper age, solicitation or transportation. A
huge section of the overall copper supply begins in South America, particularly in Peru and
Chile. Worker strikes against copper-conveying mines are not amazing in these regions, and
any worry over geopolitical insecurity can power costs upwards. On the contrary side of the
condition are the U.S. additionally, China, two nations that are incredibly huge buyers of
copper. The prosperity of the world's two greatest economies influences pretty much
everything.
Issue 8: It talks about the strategies we have given by hedging through Futures way.
Response 8:
Upsides: As you sell a future contract, you have kept yourself safe to the potential down side
if any as you will earn if the prices of the stock go down. Margin requirements for the
majority of the items and monetary forms are entrenched in the futures market. Accordingly,
a merchant knows how much margin he should set up in an agreement. A speculator needs to
place in a margin—a small amount of the aggregate sum (regularly 10% of the agreement
esteem)— to be put resources into prospects.
Downsides: As you sell the future contract, your profit will remain the same. There will be
no impact on your profit as you did a total hedge. Even if the price goes up you have to pay to
th e future buyer.The margin is a security that the speculator needs to keep with the trade on

the off chance that the market moves inverse to the position he has taken and he brings about
loses. This might be more than the margin sum; in which case the financial specialist needs to
pay more to carry the margin to a support level. What exchanging Futures basically implies
for the speculator is that he can open himself to a lot more noteworthy estimation of stocks
than he could when purchasing the first socks. What's more, in this way his benefits likewise
increase if the market moves toward him (multiple times if margin prerequisite is 10%).
Issue 9: It talks about the historical development of the commodity futures (especially those
related to copper) in the past few decades
Response 9: For as long as year, copper exchanged like a teeter-totter on the on-once more,
off-again any expectations of a U.S. what's more, China exchange accord. Presently it's
progressively similar to a rollercoaster ride down. The emphasis is progressively on the harm
brought about by the destruction of an exchange question between the world's two greatest
economies. The expansive applications for copper mean it's especially powerless against the
synchronized spiral being seen in everything from vehicle making and earth-moving
hardware to business property and progressed electronic segments. What the hard information
is letting us know is that end-use request is moderate and in numerous spots getting kicked
very hard, Oliver Nugent, a metals strategist at Citigroup Inc., said by telephone from
London. China's commodity concentrated economy is as powerless as it's been in late history.
On Friday, copper got through an exchanging range that is kept going since July 2018, hitting
another two-year low. With zinc and aluminium likewise diving, here are six graphs
demonstrating the base metals markets' expanding request emergency.
Issue 10: It talks about how to commodity future market will look like in next 5 years.
Response 10: The future may has cut its year conjecture at copper costs to $4,800 per ton
fully expecting mining cost emptying, higher yield and a stoppage in Chinese interest
development(BuHamdan, Alwisy, Bouferguene & Al-Hussein, 2019)The re-examined
conjectures, which are $400 underneath its past evaluations, restore it as the most bearish
standard venture bank covering the copper showcase, outperforming Bank of America, which
is determining a normal copper cost of $4,969 for 2016. (Davcik & Grigoriou, 2019) I am
being bearish on the copper advertise for as far back as more than two years; however, it is
currently gauging costs 20% beneath spot levels and 30% underneath accord gauges.
(Akcura, Sinapuelas & Wang, 2019)

Conclusions
Item worth risk normally is the defencelessness looked by corporates to source or sell a thing
at an expense. The nature and sort of item cost danger changes from industry to industry.
Every association getting a certain thing will defy the trial of ground-breaking esteem the
officials. Depending on the item, it will in general be treated as an "acquisition commodity
danger" or "tradable commodity possibility". Verifying danger is progressively connected
with towards the physical store system side of the business however tradable peril is on the
cash related risk and
supporting of the business. Inside the thing worth chain, corporates are looked with changed
sorts of item threats including 'stock worth shot' with the risk of falling expenses, 'reason
danger' which is the differentiation in benchmark cost of the physical item and the auxiliary
instrument used to help the thing cost, and hedge shot which for a creator is on the risk of
falling expenses, and buyers on increasing expenses. Corporates revealed on the acquisition
side of the value chain from the outset overview the feasibility of lessening the impact of
rising commodity costs by passing it on to the customer on the wrapped-up items. Then
again, such corporates similarly will all in all counsel with their suppliers towards a fixed
worth comprehension which transforms into an inconvenient trouble where the esteem
disclosure and benchmark costs of that thing are clear and viably open to all market
individuals. Basically, corporates revealed on the arrangements side of the value chain
structure assessing limits or through wandered cost bunches inside the arrangement which act
as an introduced backup. Then again, most corporates look towards supporting their
arrangements should the thing benchmark cost be available to help through a subordinate
instrument. (Malenbaum, 2019) Corporates on the overall scale have progressed and today
utilize the liquid benchmarks to trade on the exchange additionally, bolster the commodity
worth danger using backup things. Exchange traded backups has its ideal conditions of clear
assessing, organized contracts and no default risk. To a gigantic degree business keep on look
into the over-the-counter ('OTC') auxiliaries promotes similarly as in the commodity
exchanges. (Song & Liao, 2019)The OTC markets outfit such corporates with the limit to
alter the understanding that best fits with the presentation profile of the Company - which
isn't open in the exchange publicize due to trustee need of the organization of understandings.
Another safeguard for looking into the OTC market when in doubt stems where the
benchmark costs open in the exchanges are not acclimated to the expense disclosure approach
for verifying or selling the item by the corporate. (Ju, 2019)

References
Akcura, M., Sinapuelas, I., & Wang, H. (2019). Effects of multitier private labels on
marketing national brands. Journal Of Product & Brand Management, 28(3), 391-407. doi:
10.1108/jpbm-10-2017-1623
BuHamdan, S., Alwisy, A., Bouferguene, A., & Al-Hussein, M. (2019). The application of
multi-attribute utility theory for a market share-based design evaluation. International Journal
Of Housing Markets And Analysis. doi: 10.1108/ijhma-11-2018-0087
Chan, J., Jacobi, L., & Zhu, D. (2019). How Sensitive Are VAR Forecasts to Prior
Hyperparameters? An Automated Sensitivity Analysis. Advances In Econometrics, 229-248.
doi: 10.1108/s0731-90532019000040a010
Cooper, G. (2017). The interpretation of the generalised derivative operator. Geophysical
Prospecting, 66(1), 197-206. doi: 10.1111/1365-2478.12539
Davcik, N., & Grigoriou, N. (2019). How an unequal intra-firm resources distribution affect
market share. Marketing Intelligence & Planning. doi: 10.1108/mip-03-2019-0170
Elfarhani, M., Mkaddem, A., Rubaiee, S., Jarraya, A., & Haddar, M. (2019). Prediction of
foam impulse response through combination of hereditary and fractional derivative
approaches. Multidiscipline Modeling In Materials And Structures, 15(4), 800-817. doi:
10.1108/mmms-10-2018-0164
Fu, J., Tang, H., & Chen, H. (2019). Rapid computation of rotary derivatives for subsonic and
low transonic flows. Engineering Computations, ahead-of-print(ahead-of-print). doi:
10.1108/ec-09-2018-0399
Hanisch, A. (2019). Factors influencing the propensity of real estate investors in the UK to
employ property derivatives. Journal Of Property Investment & Finance, 37(2), 194-214. doi:
10.1108/jpif-01-2018-0005
Henderson, V., & Hobson, D. (2010). OPTIMAL LIQUIDATION OF DERIVATIVE
PORTFOLIOS. Mathematical Finance, 21(3), 365-382. doi: 10.1111/j.1467-
9965.2010.00455.x

Hung, N. (2019). An analysis of CEE equity market integration and their volatility spillover
effects. European Journal Of Management And Business Economics, ahead-of-print(ahead-
of-print). doi: 10.1108/ejmbe-01-2019-0007
Ju, X. (2019). Herding behaviour of Chinese A- and B-share markets. Journal Of Asian
Business And Economic Studies, ahead-of-print(ahead-of-print). doi: 10.1108/jabes-03-2019-
0022
Kampf, J. (2013). The derivative of the parallel volume difference. Mathematische
Nachrichten, 286(16), 1668-1686. doi: 10.1002/mana.201200225
Malenbaum, M. (2019). China’s impact on pass-through to US import prices. Journal Of
Chinese Economic And Foreign Trade Studies, 12(1), 55-72. doi: 10.1108/jcefts-11-2018-
0043
Oktavia, O., Siregar, S., Wardhani, R., & Rahayu, N. (2019). The role of country tax
environment on the relationship between financial derivatives and tax avoidance. Asian
Journal Of Accounting Research. doi: 10.1108/ajar-01-2019-0009
Panda, A., Nanda, S., & Paital, R. (2019). An empirical analysis of stock market
interdependence and volatility spillover in the stock markets of Africa and Middle East
region. African Journal Of Economic And Management Studies, 10(3), 314-335. doi:
10.1108/ajems-10-2018-0293
Park, H., Chung, J., & Kwon, O. (2018). Application of virtual flight test framework with
derivative design optimization. Aircraft Engineering And Aerospace Technology, 90(9),
1445-1463. doi: 10.1108/aeat-06-2017-0149
Petry, J. (2014). Regulatory Capture, Civil Society & Global Finance in Derivative
Regulation: An Analysis of Commodity Derivative Regulation in Europe. SSRN Electronic
Journal. doi: 10.2139/ssrn.2450644
Ramachandran, I., Lengnick-Hall, C., & Badrinarayanan, V. (2019). Enabling and leveraging
ambidexterity: influence of strategic orientations and knowledge stock. Journal Of
Knowledge Management, 23(6), 1136-1156. doi: 10.1108/jkm-11-2018-0688
Ramlall, I. (2018). Derivatives and Financial Stability. Economic Areas Under Financial
Stability, 69-94. doi: 10.1108/978-1-78756-841-920181004

Rendtorff, J. (2019). Corporate Social Responsibility, Sustainability, and Stakeholder
Management. Philosophy Of Management And Sustainability: Rethinking Business Ethics
And Social Responsibility In Sustainable Development, 43-52. doi: 10.1108/978-1-78973-
453-920191004
Sobczyk, T., Radzik, M., & Radwan-Pragłowska, N. (2019). Discrete differential operators
for periodic and two-periodic time functions. COMPEL - The International Journal For
Computation And Mathematics In Electrical And Electronic Engineering, 38(1), 325-347.
doi: 10.1108/compel-03-2018-0123
Song, M., & Liao, Y. (2019). Information sharing, operations capabilities, market intelligence
responsiveness and firm performance. Baltic Journal Of Management, 14(1), 58-78. doi:
10.1108/bjm-04-2018-0156
TOWN, S. (2016). ANALYSIS OF DERIVATIVE WORDS IN THE ENGLISH
LANGUAGE. [Place of publication not identified]: FORGOTTEN Books.
Vahdatmanesh, M., & Firouzi, A. (2018). Price risk management in BOT railroad
construction projects using financial derivatives. Journal Of Financial Management Of
Property And Construction, 23(3), 349-362. doi: 10.1108/jfmpc-04-2018-0021
Y, G. (2016). The Inverse Derivative - The New Algorithm of the Derivative. Journal Of
Applied & Computational Mathematics, 5(3). doi: 10.4172/2168-9679.1000311
Yadav, S., Pandey, R., Shukla, A., & Kumar, K. (2019). High-order approximation for
generalized fractional derivative and its application. International Journal Of Numerical
Methods For Heat & Fluid Flow, 29(9), 3515-3534. doi: 10.1108/hff-11-2018-0700
Yadav, S., Pandey, R., Shukla, A., & Kumar, K. (2019). High-order approximation for
generalized fractional derivative and its application. International Journal Of Numerical
Methods For Heat & Fluid Flow, 29(9), 3515-3534. doi: 10.1108/hff-11-2018-0700