2.In February, a palm oil producer anticipates that he will have 200 metric tonnes of CPO ready for sale in July. The current market price of the palm oil is about RM2,550 per metric tonne while July FCPO is currently trading at RM2,650.
a) Calculate the number of futures contracts that the palm oil producer needs to sell to hedge this exposure. (1m)
b) Assume that by July, the price of CPO in the cash market has fallen by 10%, calculate what is the gain per metric ton from the futures market that the producer get to offset his losses in the cash market. (3m)
c) Calculate the producer total sales value and losses due to price decline in the cash market at maturity if there is no hedge.(3m) d) How would your answer be different if the producer decided to hedge only 80% of the total produced CPO. (3m)