[go: up one dir, main page]
Scribd
Upload
8K views4 pages

Tutorial FIN645 Answer - CPO

1. Desmond hedged his price risk of 1000 tons of CPO for delivery in August by buying 40 August CPO futures contracts in June. However, the price fell and he ended up paying a higher effective price of RM2122 per ton compared to the market price of RM2100 without hedging. 2. Speculating on falling CPO prices in July 2017, Desmond sold 5 CPO futures contracts in June at RM2734. By closing the position on 23 August at RM2725, he made a profit of RM1125. Had the price closed at RM2738 instead, he would have made a loss of RM500. 3. By arbitraging the June and

Uploaded by

Masha Naizli Menhat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
8K views4 pages

Tutorial FIN645 Answer - CPO

1. Desmond hedged his price risk of 1000 tons of CPO for delivery in August by buying 40 August CPO futures contracts in June. However, the price fell and he ended up paying a higher effective price of RM2122 per ton compared to the market price of RM2100 without hedging. 2. Speculating on falling CPO prices in July 2017, Desmond sold 5 CPO futures contracts in June at RM2734. By closing the position on 23 August at RM2725, he made a profit of RM1125. Had the price closed at RM2738 instead, he would have made a loss of RM500. 3. By arbitraging the June and

Uploaded by

Masha Naizli Menhat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

Tutorial FIN645 Answer

1. Hedging CPO - June 2019 (Question 4)


b) To manage the price risk due to increase in price, Desmond should apply long hedge. He
should buy CPO futures today (June) and sell CPO futures later (August).

No. of contract = 1000/25 = 40 contracts

Cash market BMDB


Jun 2019 Project to have 1000 tons of palm Buy 40 August CPO futures at
oil in August 2019 to deliver to the Rm2300
refiner. Current price is RM2150.
August 2019 Buy 1000 tons of palm oil at Sell 40 August CPO futures at
Rm2100 RM2280

Hedging benefit:
1. Futures position = (2280 – 2300) x 40 x 25
= (Rm20,000)
2. Cash position = 2100 x 1000
= (Rm2,100,000)
3. Net effect = (20,000) + (2,100,000) + (2x1000)
= (2,122,000)
4. Effective price = 2,122,000
1000
= RM2122
Price is not effective as Desmond has to pay at higher price RM2122 compare to without
hedging RM2100. He has made wrong estimation because CPO price is falling.
2. Speculating CPO – July 2017 (Question 4)
i) Calculate the variation gains or losses and total profit or loss if he decides to close out on
23 August 2017.
Downtrend, so sell today, buy later
Initial margin = Rm8000 x 5 contracts = Rm40,000
Maintenance margin = Rm6000 x 5 contracts = Rm30,000

Date Closing Price Floating Profit/loss Current margin


0 2734 (Selling) - 40,000
19/8 2730 500 40,500
20/8 2720 1250 41,750
21/8 2725 -625 41,125
22/8 2732 -875 40,250
23/8 2725 875 41,125

Floating profit until day 5 = (2734 – 2725) x 5 x Rm25

= RM1125

Or 41,125 – 40,000 = RM1125

ii) Calculate total profit or loss if on 23 August 2017 the CPO price closes at RM2738.

= (2734 – 2738) x 5 x Rm25 = (RM500) loss


3. Arbitraging June 2018
Calculate days
Mid May = 1-15 may (15days)
June =1-30 june(30days)
July =1-15july (15days)
Total days = 60days

1. Fair value = F = S [1.00 + (r x t/365)] + [(c x t/365)]


= 2250 [1.00 + (0.045 x 60/365)] + [(20x12/365)]
=2306.09

2. Compare FV vs Actual price


= 2306.09 vs 2330 (july fcpo)
*sell FCPO and Buy physical CPO

3. NOC = 2500/25 = 100 contracts

Date/market Cash market Futures Market


May Buy 2500 MT physical Sell 100 contracts July
CPO @ RM2250 FCPO @2330
July Pay cost of holding CPO Deliver 2500 MT to
for 60 days designated port.

Arbitrage Profit/loss:
Revenue from selling = 100 x RM25x rm2330 = 5,825,000
Minus;
Cost of purchasing = 2500MT x RM2250 = 5,625,000
Interest expense = RM5625000 x 0.045 x 60/365 = 41610
Storage cost = RM20 x 12 x 2500MT x 60/365 = 98630
Gross profit = 59,760
4. Spreading CPO December 2016 (Question 3c)
Inter-month spread
Nearby month overprice- sell nearby contract, buy distance contract
Today Sept 2016, trading contract is December 2016 at 2530
January 2017 at 2511.
Noc 20
Commission rm50 x 20 x 2contract months = 2000
Later October 2017
Dec 2016 at 2505 and Jan 2017 at 2515
Month December 2016 January 2017 b.p
Now (Sept 16) Sell 20 contract Buy 20 contracts 19bp
@2530 @2511
Later (Oct 16) Buy 20 contracts Sell 20 contracts 10bp
@2505 @2515
b.p 25bp 4bp 29

Net profit/loss = 29 x 20 x 25 = 14,500


- Commission 2000
=12,500

You might also like