Assume that the spot price for crude palm oil is RM2,275. If the storage cost is...

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Assume that the spot price for crude palm oil is RM2,275. If the storage cost is RM5 per month, the risk-free interest rate is 5%, the yield on cash commodity is nil, the contract expires in two months. Suppose the April futures are trading at RM 2,340. i. Determine the fair price of the futures contract. ii. iii. Describe what the trader would do to take advantage of this mispricing. Determine the profit the trader would have obtained if he arbitrages. ii. Calculate the profit or loss under each scenario. (a) FRIM at RM33 (3 marks) b. Syaza just bought 100 shares of FRIM at RM45 per share and as protection he also bought a three-month put with a RM45 strike price at a cost of RM400. One of two scenarios is expected to occur in the next three months: • FRIM stock declines to RM33; and • FRIM stock rises to RM61. i. (b) FRIM at RM61 (2 marks) (5 marks) (3 marks) (3 marks) Explain how the hedge has provided protection for Syaza's position in FRIM. Ignore transaction costs. (4 marks) Assume that the spot price for crude palm oil is RM2,275. If the storage cost is RM5 per month, the risk-free interest rate is 5%, the yield on cash commodity is nil, the contract expires in two months. Suppose the April futures are trading at RM 2,340. i. Determine the fair price of the futures contract. ii. iii. Describe what the trader would do to take advantage of this mispricing. Determine the profit the trader would have obtained if he arbitrages. ii. Calculate the profit or loss under each scenario. (a) FRIM at RM33 (3 marks) b. Syaza just bought 100 shares of FRIM at RM45 per share and as protection he also bought a three-month put with a RM45 strike price at a cost of RM400. One of two scenarios is expected to occur in the next three months: • FRIM stock declines to RM33; and • FRIM stock rises to RM61. i. (b) FRIM at RM61 (2 marks) (5 marks) (3 marks) (3 marks) Explain how the hedge has provided protection for Syaza's position in FRIM. Ignore transaction costs. (4 marks)

Answer rating: 100% (QA)

i To determine the fair price of the futures contract we can use the costofcarry model The fair price of the futures contract is given by Fair Price S... View the full answer