A newly established commodity exchange in India is evaluating whether agricultural and industrial commodities should be introduced for Futures and…

A newly established commodity exchange in India is evaluating whether agricultural and industrial commodities should be introduced for Futures and options trading. The management committee studies the "commodity characteristic approach" to assess the suitability of commodities for derivatives trading. The committee identifies several essential characteristics for successful commodity derivatives trading. The committee also noted that where producers and buyers already rely extensively on long-term forward contracts, the need for organized derivatives markets is reduced one. During stakeholder consultations, warehouse operators explain that commodity derivatives markets help them hedge the price risks associated with carrying inventories over time. Exporters and manufacturers further emphasize that standardized derivative contracts require homogeneous commodities so that actual delivery can occur smoothly in the Futures market. Market participants also highlight that hedgers seek not only price risk reduction but also flexibility, easy market access, and efficient clearing and settlement systems. In response, the exchange decides to strengthen both its core hedging services and peripheral convenience services. One of the industrial participants A Ltd. (an electric wire manufacturer) is interested in using the exchange services. The company regularly purchases copper for production purposes and is currently long on 10 metric tonnes (MT) of copper at a Spot price of ₹ 1,185 per kg. Since the company intends to hold the copper inventory during the next quarter, its treasury department becomes concerned about possible adverse price movements and decides to hedge the exposure using copper Futures traded on the newly established exchange. The company's risk management team collects the following market data: Standard deviation of changes in Spot prices = 4% Standard deviation of changes in Futures prices = 6% Correlation coefficient between Spot and Futures prices = 0.75 Similarly, another participant X Ltd., a warehouse operator stores 10,000 units of a commodity currently priced at ₹ 1,600 per unit. Due to expected market volatility, the operator anticipates a decline of 12% in commodity prices over the next three months. To reduce price risk, the operator decides to hedge the inventory using commodity Futures contracts. From the information given above, choose the correct answer to the following questions: