Your plantation company has produced 10,000 tonnes of palm oil. Today is early May 2006 and...

Transcribed Image Text:

Your plantation company has produced 10,000 tonnes of palm oil. Today is early May 2006 and you managed to sell only 3,000 tonnes in the cash market at RM1,300 per tonne. In anticipation of falling prices, you decided to hedge the unsold stock by selling June 2006 futures which currently trading at RM1,255. As expected, in early June 2006, both prices dropped to RM1,245 and RM1,210 in the cash and futures markets, respectively, show your hedging benefits as measured by effective price. Assuming both prices, unexpectedly, have risen instead of fallen to RM1,350, is there any hedging benefit? Why and how? Your plantation company has produced 10,000 tonnes of palm oil. Today is early May 2006 and you managed to sell only 3,000 tonnes in the cash market at RM1,300 per tonne. In anticipation of falling prices, you decided to hedge the unsold stock by selling June 2006 futures which currently trading at RM1,255. As expected, in early June 2006, both prices dropped to RM1,245 and RM1,210 in the cash and futures markets, respectively, show your hedging benefits as measured by effective price. Assuming both prices, unexpectedly, have risen instead of fallen to RM1,350, is there any hedging benefit? Why and how?

Answer rating: 100% (QA)

To analyze the hedging benefits lets break down the scenario step by step Initial Situation You produced 10000 tonnes of palm oil Sold 3000 tonnes in ... View the full answer