a) You are an undergraduate who has taken a short course on derivative instruments. Your grandfather...

 

Transcribed Image Text:

a) You are an undergraduate who has taken a short course on derivative instruments. Your grandfather is the Managing Director of Guthrie Berhad. You observed that in the coming months, the price of crude palm oil would fall. Your grandfather has informed you that he will be busy during the harvesting period in June this year. This plantation normally produces 5680 tonnes of crude palm oil. The manager will dispose of all the crude palm oil by the 15th of the month of harvest. You have decided to help your grandfather lock-in his expected price by going into the futures market. The following information on CPO futures is available: Contract April 1 1128 April 02 May 02 June 02 July 02 Spot price 1105 1083 1065 1120 i) April 15 May 15 1120 1102 1079 1058 1116 Based on the information above: 1098 1071 1049 1088 June 15 1062 1033 1065 July 15 1029 1028 Explain in detail what your grandfather should do to lock-in Guthrie's expected price using Crude Palm Oil futures. b) ii) Determine the result of this hedge by calculating: the number of contracts to hedge a) b) c) d) the total revenue/cost from the cash market and the total profit/loss on the futures transaction the effective price (RM) of the crude palm oil sold the imperfection of the hedge, if any. What are the main purposes of setting up the derivative market in Malaysia? a) You are an undergraduate who has taken a short course on derivative instruments. Your grandfather is the Managing Director of Guthrie Berhad. You observed that in the coming months, the price of crude palm oil would fall. Your grandfather has informed you that he will be busy during the harvesting period in June this year. This plantation normally produces 5680 tonnes of crude palm oil. The manager will dispose of all the crude palm oil by the 15th of the month of harvest. You have decided to help your grandfather lock-in his expected price by going into the futures market. The following information on CPO futures is available: Contract April 1 1128 April 02 May 02 June 02 July 02 Spot price 1105 1083 1065 1120 i) April 15 May 15 1120 1102 1079 1058 1116 Based on the information above: 1098 1071 1049 1088 June 15 1062 1033 1065 July 15 1029 1028 Explain in detail what your grandfather should do to lock-in Guthrie's expected price using Crude Palm Oil futures. b) ii) Determine the result of this hedge by calculating: the number of contracts to hedge a) b) c) d) the total revenue/cost from the cash market and the total profit/loss on the futures transaction the effective price (RM) of the crude palm oil sold the imperfection of the hedge, if any. What are the main purposes of setting up the derivative market in Malaysia?

Answer rating: 100% (QA)

To help your grandfather lockin Guthries expected price using Crude Palm Oil CPO futures you need to follow these steps i Determine the Result of the Hedge a Calculate the Number of Contracts to Hedge ... View the full answer