Copper Mine Pitch Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Copper Mine Pitch Case Solution

Problem Statement

The case discusses the importance of hedge for an underlying assets, where gold and silver were considered main commodity for Copper Mine. It has been analysed that during the current period, the prices of copper was in a stage of decline and thus imposed high volatility rate under the selected commodity market. After the critical analysis, the bank of CopperMine was considering to hedge against future uncertainties. It discussed the treasury management of CopperMine regarding the threat of increased purchase price of copper and gold. However, the situation was against bank’s suggestion because Lenka (Head of treasury), was looking to retain the strategy of no-hedge due to the concern of predicted low price cost in the future, but the current market shows that it would increase by the average amount and thus allow to increase the cost of total production of Copper Mine. According to the threat of high forward prices of the commodity, the bank proposed a company to hedge a particular amount of Copper and gold at the selected time-period in order to reduce the risk as well as volatility of prices. So it is determined that how much the quantity and prices should be hedged in order to gain the maximum amount of premium over the year.

Assessment of the impact of the bank’s proposals to the company’s financials

After analysing the banks proposal, it has been identified that the options of copper and gold would tend to increase over the years and thus, increase the total production cost of Copper Mine. This indicates that the cost of developing and refining copper and gold would increase. SO according to the current situation, the proposal of banks would help the company to retain the interest of moderate premium under the options. This would be done under the terms of hedge, which could decrease the unnecessary amount of volatility within a particular time period. Therefore, reduce the probability to increase the fluctuated prices and to remain in the normal position in the future.

If Lenka would go for the strategy of non-hedge then the situation would be quite risky for the CopperMine due to the increasing trend of commodity price in the future. In order to reduce the risk, a proper tool of hedge could help to receive a risk-free premium over the number of selected period.

Price of options under the historical volatility

If the prices would be determined through the historical volatility instead of going for the implied one, the the impact could be less risky because of the less percentage of fluctuated results as compared to the current market situation. The average rate of 36.5% shows that it would hardly allow the company to go for the hedge tool. So the main concerns for the bank was to reduce such volatility by entering into the hedge agreement.

Importance of hedge for Copper Mine

After the critical evaluation of copper and gold hedge under the model of Black Scholes, the rate of volatility would increase over the year due to the changes in the prices of commodities. Therefore, the importance of hedging for CopperMine is under consideration of the bank, it knew that the current volatility rate of options would not be favourable to the company to go for in future. It is concluded that, the difference between the historical and the implied volatility is quite high due to the factor of high cost under the purchase of the particular commodity. Therefore, Copper Mine should implement the strategy of hedging in order to overcome potential loss of over-productive cost under the purchase of Copper and gold in the spot price level instead of going for strike price......................

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