Xplore Palm Oil is the best the best producer of palm oil in Malaysia and its export almostRM10 billion in last year. The CEO of the firm is worries with the new variant of Omicron and it will affect to the economy again. Therefore, he contacted you as a financial advisor how to protect his company from the risk arising due to Covid-19. In March 2022, the company will produce 50,000 tonnes of palm oil and will exported to US and Europe. From the current news, there are high case of Omicron found in Europe. If government Malaysia blocked all the shipping of their exports to related country, this will damage their palm oil. Today (January 2022), the physical oil price is RM3440 and the price in the spot month isRM3570, one-month price is RM3300, two-months price is RM3170 and three-months price is RM2930 for the price in the futures market. The current cost of storage is RM11 per tonne per month, the interest rate is 3.8%, dividend yield is 5.5%.You assume upon maturity, the price in the cash market is reducing by 5% and the price in the futures market for the one month price is reduce by RM78, two-months price is reducing by RM90 and three-months price is reducing by RM112.

Required:
a. What are the factors affected to palm oil industry and make a trader to enter the derivatives market to protect themselves? (5 marks)
b. As a financial advisor, what is the best strategy for Xplore that you may suggest to reduce the losses from the risk arising? Why?

Answer rating: 100% (QA)

a Factors affecting the palm oil industry and reasons for entering the derivatives market for protection 1 Price Volatility Palm oil prices can be highly volatile due to various factors such as weathe... View the full answer