Question
Mr. A has the following information on Malaysia crude palm oil (CPO). Date today = 1 Nov 2022 Spot price = $3000 rf = 5%
Mr. A has the following information on Malaysia crude palm oil (CPO).
Date today = 1 Nov 2022 Spot price = $3000 rf = 5% per year 1 tick = $25 Annual storage cost = $ 100 per ton (3% per annum) FCPO Jan2023 = $3300 FCPO Apr2023 = $3550 Brokerage fee= $0 Suppose Mr. A with no current position in CPO bullish on CPO for the next 3 months. Mr. A interested to make a profit in Malaysia derivative market.
a) Who is Mr. A? Explain his role in the derivative market.
b) Refer to (a) above, what is the appropriate strategy for Mr. A to make a profit based on his market expectation?
c) Demonstrate the profit or loss for Mr. A if Mr. A closes his position after 90 days (at the maturity day of the FCPO Jan2023 contract, the price is 10% lower)
d) What is the alternative strategy for Mr. A if he wants to reduce the risk of trading on FCPO at the same time make a profit with his expectation?
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