Unioil produces vegetable based cooking oil and butter spreads. Unioil uses large quantities of crude palm oil (CPO)in its production process as a main raw material. It is April 2021 now and Unioil estimates a need of 25,000 metric tons (MTs)of CPO in September 2021. Current spot price of CPO is RM2200 per MT. You as the procurement manager of Unioil, have the following alternatives to hedge the possible increase in the CPO price by September 2021: The analysist predicts that the CPO will be trading at RM3400 per MT in September 2021. Forward contracts on CPO for September 2021 delivery is available at RM3600 per MT. September 2021 Futures contract on CPO (FCPO) is available and currently trading at RM2280 per MT. (FCPO has a contract specification of 25 metric tons per contract). What would be your net purchase price in September 2021 if the CPO closing price in September 2021 is RM3500 per MT? Justify whether this is a perfect hedge? European Options on September 2021 CPO is available at the following prices: Sept. 2021 Strike RM/MT European Call Sept. 2021 European Put Sept. 2021 3300 200 120 3400 190 140 3500 180 150 3600 160 180 3700 140 200 You are required to evaluate each hedge alternative carefully and suggest the best hedge strategy or would you decide to remain unhedged. Your answer should include a careful cost and benefit analysis for each hedge alternative and justify your selection in terms of its certainty and effectiveness.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Question

Unioil produces vegetable based cooking oil and butter spreads. Unioil uses large quantities of crude palm oil (CPO)in its production process as a main raw material. It is April 2021 now and Unioil estimates a need of 25,000 metric tons (MTs)of CPO in September 2021. Current spot price of CPO is RM2200 per MT. You as the procurement manager of Unioil, have the following alternatives to hedge the possible increase in the CPO price by September 2021:

The analysist predicts that the CPO will be trading at RM3400 per MT in September 2021.
Forward contracts on CPO for September 2021 delivery is available at RM3600 per MT.
September 2021 Futures contract on CPO (FCPO) is available and currently trading at RM2280 per MT. (FCPO has a contract specification of 25 metric tons per contract). What would be your net purchase price in September 2021 if the CPO closing price in September 2021 is RM3500 per MT? Justify whether this is a perfect hedge?
European Options on September 2021 CPO is available at the following prices:

Sept. 2021 Strike RM/MT	European Call Sept. 2021	European Put Sept. 2021
3300	200	120
3400	190	140
3500	180	150
3600	160	180
3700	140	200

You are required to evaluate each hedge alternative carefully and suggest the best hedge strategy or would you decide to remain unhedged. Your answer should include a careful cost and benefit analysis for each hedge alternative and justify your selection in terms of its certainty and effectiveness.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions