A palm oil producer anticipates having 250 tonnes of crude palm oil ready for sale in two months at the current spot price of RM1,260 per tonne. To introduce stability, the producer can hedge by entering into an April futures contract when the price is RM1,275 per tonne. This locks in a sale price of RM1,275 while allowing the producer to benefit if prices increase or pay a loss if they decrease compared to the futures price.

1. Hedging using Crude Palm Oil.
Suppose inFebruary,apalmoil produceranticipateshe will have 250tonnes of CPO readyfor sale in
twomonths’time.He wouldlike toseta price for hisproduce andtherebyintroduce some financial
stabilityintohisbusiness.The currentprice of CPOat auctionisRM1,260 per tonne while AprilCPO
futuresare currentlytradingat RM1275. Outline the strategyof hedgingbythe producer.
Spot/cash market Futures Market
February
Producerexpectstohave 250 tonnesCPOfor sale
inApril.
CPOprice RM1,260
February
April futuresprice isRM1275/tonne
Position:?
No.of contract: ?
# 1 contact= 25 tonnes
Total value of futurescontract?
April
CPOprice is RM1255/ tonne
Value of CPO?
Netvalue includingprofit/lossinfutures?
Effective price pertonne?
April
What isApril futuresprice?
Position:?
Total value of futurescontract?
Futuresprofit/loss?