Leveraging on opportunities with crude palm oil futures

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1 Leveraging on opportunities with crude palm oil futures Azila Abdul Aziz Chief Executive Officer / Head of Listed Derivatives KENANGA DEUTSCHE FUTURES SDN BHD (A member firm of Bursa Malaysia Derivatives Berhad (BMD)) Malaysia-Russia Palm Oil Trade Fair and Seminar (POTS) 2013

2 Content Overview 2 The bigger picture : Malaysian derivatives Underlying asset : Demand and supply Derivative overview : A global benchmark Fundamental Risk management framework Trading dynamics Broker landscape

3 The bigger picture : Malaysian derivatives 3 The only listed derivatives exchange for Crude Palm Oil Futures (FCPO) FCPO prices as Global benchmark for crude palm oil market since 1980 FCPO trades almost 73% of the total volume generated by the exchange Strategic partnership between CME and BMD to facilitate internalization Increased use of technology to increase connectivity and liquidity Facilitate efficient price discovery whilst lowering cost of trading and latency Source: Bursa Malaysia Annual Report 2012

4 Underlying asset : Demand and supply 4 World No.2 Supplier after Indonesia Palm oil Output ratio 2012 Top 10 buyers of Malaysia Palm Oil as of Jun 2013 No Destination MYR (bln) USD (bln) 1 China India Pakistan Netherlands USA Iran Benin Egypt Bangladesh Japan Source: Malaysia Palm Oil Board (MPOB)

5 Derivative overview : A global benchmark 5 Where FCPO trading is centered? BMD FCPO available on CME Globex platform - Crude Palm Oil Futures Dalian Commodities Exchange in China - RBD Palm Olein

6 Derivative overview : A global benchmark 6 Thousand FCPO Annual Volume * Est 7.8 million contracts in 2013 Tremendous growth Improvement in liquidity CAGR of 30% in the last 13 years Source: Bursa Malaysia * KDF estimates

7 Derivative overview : A global benchmark 7 Actively traded product on the Malaysian Derivative Exchange Generic 3 rd Crude Palm Oil Futures Volatility 2013* 30 (D) 20.02% 60 (D) 16.16% 90 (D) 17.18% Source: Bursa Malaysia, Bloomberg

8 Derivative overview : A global benchmark 8 Thousand (V) FCPO average daily volume and open interest Thousand (OI) FCPO investors breakdown 2013* Source: Bursa Malaysia, *KDF estimates

9 Derivative overview : A global benchmark 9 Users of FCPO: Foreign banks Hedge funds CTAs High frequency traders Arbitrageurs / Basis trader Speculators - Local participant Domestic corporate users - Plantation companies Futures trades more than 9 times of CPO production

10 10 Advantages of FCPO : Manage price risk Allowing leveraging Avenue to short sell Immediate exposure into commodity market Futures position secured by BMD clearing house Fundamental Factors to watch: Correlation with Soy oil MPOB data* Import and export data (ITS &SGS) Import tariff Export tax Seasonal production Weather conditions Currency fluctuations (MYR against the US) * MPOB data includes : production, export, import and ending stocks

11 Risk management framework 11 Risk tolerance and volatility reduction Identify your exposure Objective of hedging 1 Quantify risks Products and grades to be hedged 2 Choosing the hedging instruments 4 Hedging parameters Partial hedging or creating a portfolio of options Choosing the appropriate tenor 3 BMD has 3 year tenors to hedge

12 Illustration 12 Buyers Concerns : Fear of price decrease Hedging : Selling FCPO contracts Solutions Sellers Concerns : Fear of price increase Hedging: Buying FCPO contracts

13 13 Graphical Illustration Buys palm oil Sells palm oil Physical Market Protection from price decrease Protection from price increase Sell FCPO contract Buy FCPO contract

14 Trading dynamics 14 Bloomberg ticker : KOA Cmdty Tick Size : RM 25 per tick (USD 7.81) Contract Size : RM 73,950 (USD 23,109) ADV (3 rd Month) : 16,467 contracts (USD 380 million) ADV (All listed month) : 30,373 contracts (USD 702 million)

15 Trading dynamics 15 Intraday Day Volume distribution Source: Bloomberg

16 Broker landscape 16 Number of trading participant in Bursa Malaysia Derivatives Top member firms for all products (exclude locals), YTD Source: Bursa Malaysia, *KDF estimates Rank Exchange member 1 Kenanga Deutsche Futures Sdn Bhd 2 TA Futures Sdn Bhd 3 RHB Investment Bank Bhd 4 CIMB futures Sdn Bhd 5 JP Morgan Securities (M) Sdn Bhd 6 Okachi (M) Sdn Bhd 7 Philip Futures Sdn Bhd 8 LT International Futures (M) Sdn Bhd 9 AM Futures Sdn Bhd 10 Inter Pacific Securities Sdn Bhd

17 In a nutshell 17 Due to increased globalization, palm oil prices are exposed to price fluctuations FCPO - readily available derivatives product that buyers/sellers may take opportunity to mitigate price risks. Being a global reference for palm oil prices, these contracts provides ample liquidity Hedgers may take reference of the parameters outline in the risk management framework Consult member firm of BMD for better product understanding and connectivity solutions

18 18 TOLL FREE (Singapore) (Hong Kong)

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