The Usage of CPO Futures

Topics: Futures contract, Hedge, Commodity market Pages: 3 (937 words) Published: February 28, 2013
The usage of CPO futures
Major group of users of CPO futures who are corporate users, institutional investors and individual investors used the CPO futures as a tool to hedge against a price increase or decline in palm oil or other close substitutes, such as soya or rapeseed oil in near future. CPO futures are also used as an alternative for holding physical palm oil until it is required in the physical market and they are traded in a directional market movement by buying low or selling high in a bullish market or vice versa in a bearish market. The availability of CPO futures provided the arbitrage opportunities from price discrepancies. There are few types of trading strategies with the CPO futures which including the hedging with CPO futures, speculating with CPO futures and arbitraging with CPO futures. Hedging is usually used by the individuals and corporations to make purchases or sales in the commodity futures market for the purpose of establishing a known price level in advance, for something they later intend to buy or sell in the physical commodity market. Hedging divides into a position hedge and anticipatory hedge. The position hedge is to take a futures position that is equal and opposite to a position held in the commodity market in order to offset the risk of an adverse move in prices of the underlying commodity whereas the anticipatory hedge is to lock in the prices of the underlying assets that the individuals and corporations intend to buy or sell in the future through buying or selling the commodity futures contract. In these two ways, the traders can protect themselves from the risk of an undesirable price change in the future. However, the traders forego the potentials of making profit in the event the prices of the underlying commodity go up in exchange for the elimination of the downside risk by hedging. Next, speculation is the action of betting on where the market is heading based on the speculators’ option. For...
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