A refiner has 250 tons of CPO in inventory. He will be holding this over the next 3 months. He intends to protect himself from a fall in the price of CPO which could cause him losses since his output price tied to CPO prices. He has the following information.

 

Current inventory = 250 tons

Spot price = RM1100 per ton
Interest rate = 6% per year
Annual storage cost  = RM 44 per ton (4% per annum)

3-month CPO futures  = RM 1126.53 per ton

 

Q1: How can the refiner use the CPO futures contract to protect himself from falling CPO prices? 

Prove that the hedge strategy will "lock-in" the value of his inventory, in two possible price scenarios for the CPO in 90 days as follows:

 

Q2: Scenario 1: Suppose CPO price falls 20% (to RM 880 per ton)

 

Q3: Scenario 2: Suppose CPO price rises 20% (to RM 1,320 per ton)

Answer rating: 100% (QA)

1 The refiner can use the CPO futures contract to protect himself from falling CPO prices by enterin... View the full answer