A refinery has 250 tons of CPO on hand. This will be held over the following three months. He aims to hedge against a drop in CPO prices, which might result in losses since his production price is linked to CPO prices. The following information is available to him.
Current inventory = 250 tons
Spot price = $31100 per ton
Interest rate = 6%
per year Annual storage cost = $ 44 per ton (4% per annum)
3-month CPO futures = $ 1126.53 per ton
How can the refiner protect oneself from declining CPO prices by using the CPO futures contract?
