The firm's CEO has singled out the currency exchange rate as one of the major factor for the erosion in EPS because the firm exporting crude palm oil too many countries with priced in US dollar. So, changes in currency values to U.S. dollar affect the ringgit Malaysia. As we know, Malaysian currency keeps within a very narrow range of exchange rate with the dollar. The pegged exchange rate arrangement requires authorities to intervene in the foreign exchange market to maintain the fixed exchanged rate. They will have to buy domestic currency when it is in excess supply and sell it when it is in excess demand to avoid a currency depreciation or appreciation. So, when the dollar depreciates, currencies pegged to the dollar will also depreciate against other currencies.
Option and futures are different derivative instruments, but have similarities in many aspects. First, options and futures can be used for hedging. Both can be used to partially or totally hedge the directional price risk of an asset. Big funds and institutions can hedge the downside risk of their holdings using options or futures instead of selling their shares in order to maintain their account value. Second, options and futures are both merely contracts that allows a company to trade and bind the exchange of their underlying assets at certain specific prices from price movements. Both exist for the purpose of facilitating the trading of their underlying assets. Third, the similarities between options and futures are both can be used to profit in ways other than the price movements of the underlying stock itself. Company can used futures spreads to speculate in seasonal price differences between the price of futures contract of different expiration months and option spreads can be structured to profit from time decay no mater which way the underlying assets goes. Last but not least, the similarities between options and futures, both are leverage instrument, means that both trading using this derivatives instruments give company ability to control the price movements on more of their underlying assets than cash would usually allow.
The differences between options and futures are, the obligations they put on buyers and sellers. Call options gives buyers the right but not obligation to buy or sell a certain asset at a specific price at any time during the life of the contract. A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date, unless the holder's position is closed prior to expiration. Another difference between options and futures is the size of the underlying positions. The underlying positions is much larger for futures contract, and the obligation to buy or sell this certain amount at a given prices makes futures more risky for the inexperienced investor. Other major differences between options and futures are the way the gains are received by the parties. The gain on an option can be realized in three ways that is exercising the option when it is deep in the money, going to the market and taking the opposite position, or waiting until expiry and collecting the difference between the asset price and the strike price. In contrast, gains on futures positions are automatically marked to market daily.
The firm can buy futures contract with expiration months corresponding to the dates the firm needs inventory. Means that, in order to reduce risk; Bersatu Plantations Berhad can use long hedge. In other words, firm takes long positions in the future markets. A firm institutes a long hedge when it is committed to fixed sales prices. The futures contracts will lock in the purchases price to Bersatu Plantations Berhad.
Bersatu Plantations Berhad may experience adverse results compare to non-hedgers from a similar industry because of the expectation in the future. The firm will relatively loss compare to non-hedgers if the futures prices is more than future spot price. But, if the futures price is less than the expectation of future spot price, the firm will get normal backwardation, and non-hedgers firm will loss.
