English_Crude_Palm_Oil by prakash1588

VIEWS: 16 PAGES: 37

									MALAYSIAN PALM OIL TRADE FAIR &
    SEMINAR 2012 (POTS 2012)

“PRICE UNCERTAINTY: BMD’S ROLE
      COMES INTO FOCUS”
                 Jeffrey Tan, CFA
                General Manager
          Product & Market Development
         Bursa Malaysia Derivatives Berhad

                 16 October 2012
          Shangri-La Hotel, Kuala Lumpur


                                             1
Palm Oil Prices in the New Millennium (Jan 2000 – 5 Oct 2012)
                 FCPO 3rd Month Daily Settlement Price
    RM/MT
   5000

   4500

   4000

   3500

   3000

   2500

   2000

   1500

   1000

    500

      0
       2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
       Palm Oil Prices (Jan 2011 – 5 Oct 2012)
               FCPO 3rd Month Daily Settlement Price
 RM/MT
4500



4000



3500



3000



2500



2000
   Jan-11    Apr-11   Jul-11   Oct-11   Jan-12   Apr-12   Jul-12   Oct-12
CPO Futures Volatility (Jan 2000 – 5 Oct 2012)

 %              FCPO 3rd Month Daily 10D Volatility
120


100


 80


 60


 40


 20


  0
   2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
CPO Futures Volatility (Jan 2012 – 5 Oct 2012)
                FCPO 3rd Month Daily 10D Volatility
 %
70

60

50

40

30

20

10

0
Jan-12   Feb-12 Mar-12   Apr-12   May-12   Jun-12   Jul-12   Aug-12   Sep-12   Oct-12
Palm Oil Average Daily Volume & Open Interest (Jan 2006 – 5 Oct 2012)

   ADV '000                Jan 2006 - 5 Oct 2012                      OI '000
   50                                                                    160
   45                                                                    140
   40
                                                                         120
   35
   30                                                                    100

   25                                                                    80
   20                                                                    60
   15
                                                                         40
   10
    5                                                                    20

    0                                                                    0
     2006     2007   2008       2009    2010        2011       2012
                     ADV                       Open Interest
Palm Oil Average Daily Volume & Open Interest (Jan 2012 – 5 Oct 2012)

  ADV '000                 Jan 2012 - 5 Oct 2012                     OI '000
   50                                                                    160
   45                                                                    140
   40
                                                                         120
   35
   30                                                                    100

   25                                                                    80
   20                                                                    60
   15
                                                                         40
   10
    5                                                                    20

    0                                                                    0
        Jan   Feb   Mar    Apr   May   Jun   Jul   Aug       Sep   Oct

                     ADV                     Open Interest
Top 10 CPO Futures Volume & Open Interest

 Rank    Volume     Date       Open Interest     Date
  1      63,019   16/05/2012     148,121       12/10/2012
  2      57,092   18/09/2012     143,338       13/10/2011
  3      56,235   23/05/2012     143,285       12/10/2011
  4      52,583   11/09/2012     142,442       11/10/2011
  5      52,473   20/06/2012     142,297       10/10/2011
  6      50,577   03/10/2012     141,918       17/10/2011
  7      50,057   12/10/2012     141,841       11/10/2012
  8      49,867   02/10/2012     141,333       14/09/2011
  9      48,741   17/11/2011     139,670       07/10/2011
  10     48,704   24/02/2011     139,665       14/10/2011
   Commodity Derivatives Traded (Selected)
  Commodity                      Exchange         Largest              Ratio of
                                                 Producing           Derivatives to
                                                 Countries            Production
 Natural Rubber                SHFE (China)   Thai/Indonesia/M’sia      111.72x

 Crude Palm Oil                 BMD (M’sia)    Indonesia/M’sia           2.64x
 RBD Palm Olein                 DCE (China)         M’sia                24.36x
     Soybean                     CME (US)             US                 24.74x
                                DCE (China)
   Soybean Oil                  DCE (China)           US                 38.27x
                                 CME (US)
  Soybean Meal                  DCE (China)           US                 17.48x
                                 CME (US)
  Corn ( Maize)                  CME (US)             US                 10.63x
                                DCE (China)
       Sugar                    ZCE (China)          Brazil              18.55x
                                 ICE (US)

Source : World Federation of Exchanges
Market Demography of FCPO




 Source : BMD               14
Crude Palm Oil Options

§  Increasing market usage of futures. Level of
    sophistication increasing and market users ask for
    options.

§  Launched on 16 July 2012 and complements the futures
    contract.

§  Provides a wider array of risk management tools for palm
    market – different risk/reward profiles
 OCPO Contract Specs
Contract Code     Calls: C OCPO
                  Puts: P OCPO
Type              European Options
Underlying        Crude Palm Oil futures contract (FCPO)
Contract Size     One Crude Palm Oil futures contract (of a specified month) of 25
                  metric tons (MT)
Tick Size         RM0.50 per MT (RM12.50 per contract)
Strike Price      Trading shall be conducted for put and call options with striking
Intervals         prices in integral multiples of RM50 per MT. There will be at least 11
                  strike prices (five are in-the-money, one is at-the-money and five are
                  out-of-the-money).
Contract Months   Monthly (list the third, fourth, fifth and sixth forward months) then
                  alternate months going out 24 months of the FCPO contract.
                  The first spot option contract month will be trading the 3rd month
                  FCPO contract.

                                                                                           16
 OCPO Contract Specs (2)
Contract Code       Calls: C OCPO
                    Puts: P OCPO
Daily Price Limit   There will be no daily price limits.
Last Trading Day    The spot options will cease trading at 6pm on the 10th day of every
                    month, or the preceding business day if the 10th day is a non-
                    business day. The futures position will be delivered at end-of-day
                    process and will be available for trading on the next business day.


Exercise            In the absence of contrary instructions delivered to the Clearing
                    House, an option that is in-the money at expiration shall be
                    automatically exercised. Exercise results in a long 3rd month FCPO
                    position, which corresponds with the option’s contract month for a call
                    buyer or a put seller, and a short 3rd month FCPO position for a put
                    buyer or a call seller.




                                                                                              17
 OCPO Contract Specs (3)
Contract Code    Calls: C OCPO
                 Puts: P OCPO
Trading Hours    First trading session: Malaysian time: 10.30 a.m. to 12.30 p.m.
                 Second trading session: Malaysian time: 3.00 p.m. to 6.00 p.m.
                 *same as FCPO trading hours

Speculative      10,000 futures equivalent contracts net long or net short for any
Position Limit   single month.
                 15,000 futures equivalent contracts for all contract months combined.

                 Speculative Position Limits are combined together with the FCPO
                 contract.




                                                                                         18
Example of OCPO Contract Months
Example: Available months to trade as at 16 October 2012
 FCPO    Nov 12   Dec 12   Jan 13    Feb 13   Mar 13   Apr 13   May 13   Jul 13   Sep 13

 OCPO      -        -      Jan 13*   Feb13    Mar 13   Apr 13   May 13   Jul 13   Sep 13


 FCPO    Nov 13   Jan14    Mar 14    May 14   Jul 14   Sep 14

 OCPO    Nov13    Jan14    Mar 14    May 14   Jul 14   Sep 14




* Jan 13 OCPO contract expires on 10 Nov 2012
* New OCPO contract month will be listed on 16 Nov 2012
together with the FCPO new contract month.




                                                                                           19
What happens when January 2013 OCPO
contract expires?
             9 Nov 2012                                 12 Nov 2012


    At 6 p.m.
  Trading ends




                  At 7.30 p.m. BMD clearing
                 house clears all the trades. If
                                                   Jan 2013 FCPO contract will
                 OCPO is in the money it will
                                                        be ready to trade
                 be converted to FCPO. If out
                 of the money the options will
                         be worthless.


                                                                                 20
21
Year to Date Market Demography for OCPO (2012)




 Source : BMD                                    22
Managing Price Risk with CPO Futures and Options

§  Market risk includes 2 components: price and basis.
    Prices are discovered with BMD futures market. Basis is
    the relationship between physical market price and BMD
    futures price (physical price – futures price = basis)

§  2 common producer strategies using BMD futures and
    options: short futures hedge and long put option hedge.
    For consumers, the reverse applies, i.e., long futures
    hedge and long call option hedge
Short Futures Hedge
§  Basic risk management strategy for producers. A short
    position is initiated as a temporary substitute for the
    eventual sale of the palm oil to a local mill or trader

§  Placed well in advance of harvest and will provide price
    protection until crop is sold. Immediately upon the sale
    of the crop, short position should be closed out

§  Since prices in cash and futures generally move up or
    down together over time, a loss in either of these
    markets will be offset by a gain in the other – thus
    allowing producers to lock in a price level in advance of
    the cash sale
 Short Futures Hedge Example: Assumptions

Sell January CPO futures:    RM2,500/MT
Expected Basis for December: -RM10/MT
Expected selling price:      RM2,490/MT

January Scenario 1: Falling Prices
Buy (offset) January futures: RM2,300/MT
Basis:                          -RM10/MT
Physical Price:                  RM2,290
Futures profit:                 RM200/MT
Actual selling price:           RM2,490/MT
Source: CME
Short Futures Hedge Example: Assumptions

Sell January CPO futures:     RM2,500/MT
Expected Basis for January:   -RM10/MT
Expected selling price:       RM2,490/MT

January Scenario 2: Rising Prices
Buy (offset) January futures: RM2,700/MT
Basis:                         -RM10/MT
Physical price:                RM2,690
Futures loss:                   RM200/MT
Actual selling price:          RM2,490/MT
Source: CME
Advantages
§    Eliminates risk of lower price levels
§    Establishes selling price in advance of physical sale
§    Strengthening basis improves selling price
§    Futures position guaranteed by BMD Clearing House

Disadvantages
§  Weakening basis lowers selling price
§  No benefit from higher price levels
§  Transaction costs
Long Put Option Hedge
§  Long put option gives the producer the right (but not the
    obligation) to sell BMD futures/CPO at a specific price
    level (strike price)

§  If prices < this level, the producer/option buyer has the
    right to sell the futures at the strike price. Should prices
    > this level, the producer not obliged to the put strike
    price. Hence, producer can sell physical production at
    the higher market

§  Eliminates downside risk while allowing the producer to
    sell at a better price level if the markets move higher
 Long Put Option Hedge Example: Assumptions
Buy 2500 January Put Option:      RM85/MT
Expected Basis for January:       -RM10/MT
Expected minimum selling price:    RM2,405/MT

January Scenario 1: Falling Prices
January futures:                RM2,300/MT
Basis:                          -RM10/MT
Physical price:                 RM2,290/MT
Put option profit:              RM115/MT
Actual selling price:           RM2,405/MT

Source: CME
 Long Put Option Hedge Example: Assumptions

Buy 2500 January Put Option:      RM85/MT
Expected Basis for January:       -RM10/MT
Expected minimum selling price:    RM2,405/MT

January Scenario 2: Rising Prices
January futures:               RM2,700/MT
Basis:                         -RM10/MT
Physical price:                RM2,690/MT
Put option loss:                RM85/MT
Actual selling price:          RM2,605/MT
Source: CME
Advantages
§  Eliminates risk of lower price level
§  Buying insurance and establishes a minimum selling
    price level
§  Benefits from a higher price level
§  No margin requirements (option buyers do not post
    margin)
§  Option position guaranteed by BMD Clearing House
    (option sellers post margins)

Disadvantages
§  Premium is paid in full at time of option purchase
§  Transaction costs
Summary
§  Short futures and long put option are 2 common risk
    management alternatives, eliminates risk of lower price
    level while long futures and long call option eliminates
    risk of higher prices

§  Establishes a minimum selling price level and vice versa
    for long futures and long call

§  Depending on needs and costs, combination of futures
    and options could be utilized
“Trading houses and consumers bet corn prices to
soar…Financial Times (2nd August 2012)

§  Worst US drought in half a century decimates the global
    corn crop. Benchmark corn futures up 50%, record high
    of $8.28/bushel
§  Options market - explosion of trades on yet higher prices
§  Call options on right to buy corn at between $9 and $10
    in December risen 13 times (CME)
§  Trading houses protecting themselves against non-
    delivery and consumers accelerate hedging programmes



Source: Financial Times
Some Observations on Options
§  If you buy options you can look like a loser for a while,
    perhaps a long while, but you can suddenly become a
    big winner (if the market moves drastically in your favour)

§  If you sell options you can be a winner fast (collect
    upfront premiums) but you can lose big suddenly (if the
    market moves drastically against you)

§  Famed investment guru like Warren Buffett is an options
    seller while veteran trader and renowned intellectual
    Nassim Taleb is a buyer of options
 Conclusion

§  BMD’s CPO futures provide a viable and liquid risk
    management market for hedgers and traders.

§  The CPO options contract added a new dimension for
    our users, with the ability to buy “insurance”

§  BMD is the marketplace for all your palm oil hedging and
    trading needs
List of Futures Brokers (www.bursamalaysia.com)
  1.  AmFutures Sdn Bhd
  2.  CIMB Futures Sdn Bhd
  3.  ECM Libra Investment Bank Bhd
  4.  HDM Futures Sdn Bhd
  5.  HLG Futures Sdn Bhd
  6.  Interactive Futures Sdn Bhd
  7.  Inter-Pacific Securities Sdn Bhd
  8.  JF Apex Securities Bhd
  9.  JPMorgan Securities (Malaysia) Sdn Bhd
  10.  Kenanga Deutsche Futures Sdn Bhd
  11.  LT International Futures (M) Sdn Bhd
  12.  Okachi (M) Sdn Bhd
  13.  Oriental Pacific Futures Sdn Bhd
  14.  OSK Investment Bank Bhd
  15.  Phillip Futures Sdn Bhd
  16.  RHB Investment Bank Bhd
  17.  Sunny Futures Sdn Bhd
  18.  TA Futures Sdn Bhd
  19.  UOB-Kay Hian Futures Sdn Bhd


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Jeffrey Tan     - jefftan@bursamalaysia.com
                   +6019 261 5332
Moriazi Mohamad - MoriaziMohamad@bursamalaysia.com
                   +6017 200 1117
Elmery Yap       - elmeryyap@bursamalaysia.com
                   +603 2034 7578

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