Analysis of Futures vs Forwards for Copper Hedging

ABC Corp is a manufacturer of electronic devices, and it is concerned about the potential fluctuations in the price of copper, which is a key input in its production process. Currently, the market price of copper is $3.50 per pound. ABC Corp’s management believes that prices could rise significantly over the next six months due to global supply constraints. To manage this risk, ABC Corp is considering using both futures and forwards contracts.

Discuss the advantages and disadvantages of using futures versus forwards in this scenario. In your response, address factors such as liquidity, counterparty risk, pricing, and suitability for hedging purposes. Include specific examples to illustrate your points. Be sure to explain which strategy ABC Corp should adopt and why, based on its profile and the current market conditions.