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. 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)