Tutorial CPO futures

Question 1
A) You are a palm oil trader. You have a commitment to buy 1,000 tons of crude palm oil
(CPO) from a miller, and another commitment to sell 1,000 tons of CPO to a refiner. The
transaction will take place in one month time. Assume it is now 13 th June 2016 and the
spot price is RM2,260 per ton, while futures quotes are as follows:
Contract Month
Price (RM per ton)

June
2,268

July
2,277

August
2,275

September
2,272

Suppose you have already committed to a price for purchasing the CPO from the
miller at RM2,265/t. The refiner, however, has decided to wait before setting the
price.
i) What direction of CPO price movement would be adverse to you?
ii) How are you going to hedge your exposure? Is this an anticipatory hedging or a
current market position hedging? Which contract month are you going to trade, and at
what price? How many CPO futures contracts are you going to take out?
iii)

How much profit have you locked in part (i)?

B) In June, you observe the prices of July CPO futures and that of the August CPO
futures. July CPO futures contract is now trading at RM2,175/t while the August CPO
futures is now trading at RM2,170/t. The trader believes that the spread between the two
contract months will narrow over the next month, with July CPO futures price falling
more sharply than the August CPO futures price.
What would be your strategy if you were to speculate using spread trading?
What is the advantage of using the spread trading, as compared to outright speculation?

Question 2
A palm oil producer expects to have 85 tons of crude palm oil (CPO) ready for sale on
20th September 2016. He wants to use the CPO futures contracts that are traded on Bursa
Malaysia Derivatives Bhd. to hedge against any adverse movement of the price of CPO.
Today, on 7th of June 2016, the following contracts are available and are trading at the
prices shown in the table:
Contract
June 2016
July 2016
August 2016
September 2016
October 2016
November 2016
January 2017
March 2017
May 2017

Price (RM/ton)
2,993
2,982
2,957
2,929
2,897
2,870
2,844
2,839
2,839

To hedge his exposure in the crude palm oil price risk, what will be his strategy? In your
answer, state the position (long or short), the number of contracts to be traded and which
contract should be chosen at what price.
In this hedging exercise, what type(s) of mismatch is(are) present?

Question 3
A) Find the fair value of a July CPO futures contract (assume it will mature exactly 3
months from today) given the spot price of CPO is RM2,000/ton, the risk-free rate is 4%
p.a. and the storage cost is 4% p.a.
If the July CPO futures contract is now trading at RM2,200, is there any arbitrage
opportunity? If there is, what will be your arbitrage strategy now?
B) State the strategy (long or short)
i) A trade who has long in CPO futures wants to exit from the market.
ii) You have the strong opinion that the price of crude palm oil is to be in uptrend trend.
iii)A palm oil producer anticipates to have 100 tons of crude palm oil for sale in three
months; time.
iv)You are holding an inventory of crude palm oil.