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Why a futures contract is an excellent hedging tool

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Reference no: EM133183116

Question - Suppose in March 2021, a palm oil producer Mr. Ken anticipates having a harvest of 500 metric tons of crude palm oil (CPO) in three months. Mr. Ken will only have CPO to deliver in June 2021, so he can afford to wait until then to sell his CPO on the spot market for immediate delivery. Pursuing this course of action is risky, as the price of CPO in June 2021 can easily fall as well as rise. Mr. Ken is searching for a suitable hedging strategy to manage the price risk on his anticipated harvest. As an appointed broker, you need to advise Mr. Ken why a futures contract is an excellent hedging tool for his situation.

Reference no: EM133183116

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