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 a. How can the refiner protect oneself from declining CPO prices by using the CPO futures contract?? b. Demonstrate that the hedging approach will "lock-in" the value of his inventory in two potential CPO pricing situations in 90 days, as follows: i. Situation 1: Assume the CPO price drops by 20%. ($ 880 per ton) ii. Situation 2: Assume the CPO price increased by 20%. ($1,320 per ton

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 a. How can the refiner protect oneself from declining CPO prices by using the CPO futures contract?? b. Demonstrate that the hedging approach will "lock-in" the value of his inventory in two potential CPO pricing situations in 90 days, as follows: i. Situation 1: Assume the CPO price drops by 20%. ($ 880 per ton) ii. Situation 2: Assume the CPO price increased by 20%. ($1,320 per ton

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter21: Supply Chains And Working Capital Management

Section: Chapter Questions

Problem 11P: Negus Enterprises has an inventory conversion period of 50 days, an average collection period of 35...

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