Commodity P r ice Risk
BHP Billiton is the world’s largest mining firm. BHP expects to produce 2 billion pounds of copper next year, with a production cost of $0.90 per pound.
a. What will be BHP’s operating profit from copper next year if the price of copper is $1.25,
$1.50, or $1.75 per pound, and the firm plans to sell all of its copper next year at the going price?
b. What will be BHP’s operating profit from copper next year if the firm enters into a contract to supply copper to end users at an average price of $1.45 per pound?
c. What will be BHP’s operating profit from copper next year if copper prices are described as in part (a), and he firm enters into supply contracts as in part (b) for only 50% of its total output?
d. Describe situations for which each of the strategies in parts (a), (b), and (c) might be optimal.
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