Today, middle of August 2022 an upward in the market has attract the traders to grab the opportunity to enter the futures market. However, Abigo Foods Berhad, a manufacturer of cooking oil is worries with instability domestic political and the issue of the opponents are currently pushing the government to conduct the election as to elect the new Prime Minister. Besides, stock price of few companies that are related to former Prime Minister, Dato Seri Najib bin Razak were dropped.

Therefore, Alan a CFO in Abigo getting an advice from Alex, a dealer in the company. Alan prefer to enter the futures market today to avoid the market price increasing further. He ordered Alan to trade for 800 tonnes for the contract between today and October.

Malaysia Delivery Clearing House (MDCH) currently is charging the cost of storage at RM15 per month and the interest rate for borrower is 4.5%. Currently the CPO price is RM3550 while the CPO futures price is RM3645.

Required:

1. Alan recommend to his CFO to arbitrage. Calculate the arbitrage benefits.

2. Assess Alan strategy as above.

3. Why you choose the vice versa strategy, what would be happened? Discuss.

4. Why the fair value is needed in arbitrage strategy?

Are the arbitrageur objectives are the same as the hedger?