6 Frequently Asked Questions about Crude Palm Oil (CPO) Futures
Here we answer 6 most asked questions about crude palm oil futures.
1. What is crude palm oil (CPO) futures?
Crude palm oil futures contract is an agreement between two parties for a transaction of a specific amount of crude palm oil at a specific time in the future for a specific price. The quality, quantity, delivery time and location of the crude palm oil are predetermined in the contract.
2. Do I have to take delivery of tones of crude palm oil?
You will have to take delivery of the actual physical product, which is crude palm oil, if you hold the crude palm oil futures contract to its expiry date. So if you don’t want tons of crude palm oil delivered to your home, make sure you sell the contract before its expiry month.
3. Where is crude palm oil (CPO) futures traded?
Crude palm oil futures is traded at a number of derivatives exchanges around the world but more popularly traded in Bursa Malaysia Derivatives Exchange (BMD) and Chicago Mercantile Exchange (CME). Using the symbol FCPO, the crude palm oil futures traded in BMD is available in both Ringgit and US Dollar denominated contracts as cash settlement or deliverables. The crude palm oil futures traded at CME uses the CPO symbol and is available in US Dollar denominated contracts for cash settlement only.
4. Why crude palm oil futures is traded?
Crude palm oil futures is traded for various reasons such as price risk management and speculation. Plantation companies, refineries, exporters and millers use crude palm oil futures to manage risk and hedge against the risk of unfavourable movements in the price of crude palm oil in the physical market. Speculators, on the other hand, use crude palm oil futures to gain leveraged exposure to movements in crude palm oil prices.
5. What can affect the price of CPO futures?
Changes in weather is the main factor that affects the price of crude palm oil futures. As palm oil plantations are mostly in tropical countries such as Malaysia and Indonesia, heavy rain could flood the plantations and hamper harvesting. The price and demand of competing vegetable oils such as soy oil and corn oil can also affect the price of palm oil futures. Import policies and laws of other countries too can affect the price of palm oil futures.
6. Why should I trade crude palm oil futures?
You probably don’t realize it, but you actually use palm oil every day. The fried rice you eat for breakfast is cooked using palm oil and the soap you use to wash your hands is made of palm oil. Even the washing powders you use to wash your clothes are made of palm oil.
Palm oil is not only used as cooking oil or to make margarine, but is also used to make daily household products such as soap and washing detergent as well as personal care products like shampoo and toothpaste. As such, you can be sure that there will always be demand for palm oil.
The two major consumers of palm oil are India and China while Malaysia and Indonesia are the two major producers of palm oil. As the largest consumed vegetable oil in the world, both production and consumption of palm oil is growing annually. This obviously makes trading crude palm oil futures a potentially lucrative undertaking.
Wan Zuraiha Wan Zakaria is a staff writer at Oriental Pacific Futures (OPF) where she writes on investment and trading. OPF is a futures and options broker based in Kuala Lumpur, Malaysia and provides electronic trading, brokerage and clearing services to retail and institutional traders since 2007. OPF is licensed under the Securities Commissions of Malaysia and offers cash-settled derivatives instruments traded on Bursa Malaysia, as well as select major derivatives exchanges around the world.
Oriental Pacific Futures articles published on the Corporate Website (www.opf.com.my) may be reprinted, reposted or distributed free for educational purposes only on the condition that Oriental Pacific Futures and the Corporate Website link information http://www.opf.com.my are included. However, other organizations are invited to link to articles that are available in the public area of the Oriental Pacific Futures’ Learning Resources website. No additional permission is needed for such a link.
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