FUTURES &

OPTIONS (FIN645)
CHAPTER 4:
Mechanism of FCPO Trading
[Question]

Ahmad Fauze bin Abdul Hamit

UiTM Cawangan Sabah
ahmad920@uitm.edu.my

2020 Copyright © UiTM Cawangan Sabah | Faculty of Business &

Management
2020 Copyright © UiTM Cawangan Sabah | Faculty of Business & Management
 CHAPTER 4: MECHANISM OF FCPO TRADING

1
FCPO - HEDGING
Anticipation of Falling Prices

QUESTION 1

In October 2016, you anticipate you will have 500 metric tons of CPO ready for sale in
three months’ time. As a producer, you have been monitoring cash and future prices and
would like to set a price for your produce in anticipation of any unfavorable January 2017
crude palm oil futures (FCPO) are trading at RM2275. By December, the price of crude
palm oil and January 2017 FCPO converged at RM2255. Calculate the profit, if any.

Anticipation of Rising Prices

QUESTION 2

On 10 June 2016, you enter into an agreement with a refiner to deliver 500 tons of crude
palm oil in Kuala Lumpur on 11 December 2016. At the same time you contact an oil palm
grower who agrees to deliver the required amount of crude palm oil to him in December
2016. You decide to hedge your transaction at the futures market.

10 June 2016:
Spot Crude palm oil price RM1300
December FCPO RM1299

Assuming on December 8, 2016, you close out your hedge at RM1302. However, the
closing spot month price for that day is RM1304. Calculate the final result of the overall
transaction (in RM per ton). Assume transportation cost is RM1.00/t.

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Management
 2
FCPO - SPECULATING
Anticipation of Falling Prices

QUESTION 3

As a new trader, you speculate that palm oil prices are likely to fall in the near future. You
have asked your broker to sell 8 contracts of CPO futures at RM1,185 per tons. Assuming
that you are required to pay initial margin of RM8,500 and maintain RM7,500 per contract,
calculate your profit (if any) based on marked-to-market position using the following
closing prices for six (6) days of trading:

Day 1 2 3 4 5 6
Closing 1,181 1,174 1,178 1,186 1,199 1,228
price

Anticipation of Rising Prices

QUESTION 4

As a semi-pro speculator, you believe that palm oil prices are likely to rise in the near
future. You have asked your broker to buy 8 contracts of CPO futures at RM1,185 per
tons. Assuming that you are required to pay initial margin of RM8,500 and maintain
RM7,500 per contract, calculate your profit (if any) based on marked-to-market position
using the following closing prices for six (6) days of trading:

Day 1 2 3 4 5 6
Closing 1,181 1,174 1,178 1,186 1,199 1,228
price

2020 Copyright © UiTM Cawangan Sabah | Faculty of Business &

Management
 3
FCPO – SPREADING (INTER-MONTH SPREAD)
Anticipation of Rising Prices

QUESTION 5

You are working at the Derivatives Unit of a foreign bank. You observe the FCPO market
and expect the market to be bullish due to increasing demand for the commodity from the
industry. Presently, in early March, the FCPO is traded at RM2,250, RM2,275, RM2,300
and RM2,325 for March, April, May and June FCPO contracts respectively. You decide
to trade 5 lots each and spread the risk between April and June contracts. Based on the
trend, the spread between both contracts will be widening and you have to take this into
consideration for the trading decision. The following month, FCPO closes at RM2,300,
RM2,350, RM2,400, and RM2,450 for April to July contracts respectively. The
commission is RM50 per lot. Calculate the profit, if any.

Anticipation of Falling Prices

QUESTION 6

It is early April today and you observe that May CPO futures are trading at RM1,180 while
July CPO futures at RM1,095. You believed that May CPO futures are trading at a
relatively higher priced to July Futures and therefore decided to do a spread trade. You
have decided to close-out both contracts when May and July FCPO are trading at
RM1,105 and RM1,088 respectively. Show your spread profits, if any.

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Management
 4
FCPO – ARBITRAGING (CASH AND CARRY ARBITRAGE)
QUESTION 7

As a professional arbitrageur, you observe that at the middle of April, the spot price
for CPO is RM1,175 while May futures are trading RM1,265. Assuming your cost of
storage is RM12 per month per ton and risk–free rate is 5.5%, show your arbitrage
profit, if any for 250 tons of CPO.

2020 Copyright © UiTM Cawangan Sabah | Faculty of Business & Management