Ali is holding 20,000 kilograms stocks of palm oil. Suppose the price of 1,000 kilograms of palm

oil in the cash market is RM2,500. He wants to hedge against the decline in palm oil prices so

that it does not have a severe effect on the value of his investment.

a) Discuss the actions that Ali should do to achieve this purpose.

b) Compute the value of his portfolio when the spot price:

i) drops to RM1,400 (4 Marks)

ji) increases to RM1,900 (4 Marks)