I suppose the market today has been pretty boring, so, not surprisingly, this afternoon in my chatbox, there was a passionate discussion between chatter "Dreamy" (or mydreamgetrich) and "Dali" (author of Malaysia Finance blog) about the upcoming FUPO vs the current FCPO contract liquidity in 2 months time. For the record, I came into the picture late, and so, might not have captured the salient points.
Anyway, the debate boiled down to this single question: By November 5, 2008 (Wednesday), which of the 2 contracts (FUPO or FCPO) will have the higher daily volume in their most popular contract months?
Since this involves a specific prediction about the future, someone asked whether I can "blog capsule" this for future reference, and I am glad to do so, since this is an interesting question and discussion, and the answer does not appear obvious when there are several conflicting factors.
Starting first with the reasons to support FUPO popularity, we have Dali with his persuasive arguments, which he has blogged here - http://malaysiafinance.blogspot.com/2008/09/fupos-significance.html - and so, I won't repeat them here.
And on the other hand, the reasons to support FCPO continuing popularity are led by Dreamy & others, which I'll try to summarize here for future reference:
1. In the physical market, it is believed that Malaysian CPO companies prefer to hedge in RM than USD since most of their shareholders are local with RM profitabilities. (although Dali raised the interesting issue about local planters with US$ bonds who might prefer to hedge their US$ exposure).
2. FUPO introduced another complexity and variability (you need to also form a view on future USD/RM currency movements to trade successfully) making it more difficult to trade than FCPO, which is volatile enough already.
3. FUPO doesn't appear to have been well marketed locally by Bursa. Past attempts several years ago to introduce the USD palm kernel futures was apparently appalling.
4. More than one person thinks even if FUPO eventually overtakes FCPO, it might not do so in the first 2 months of implementation, due to the lack of marketing push by Bursa. Also, some of the new products introduced by Bursa failed miserably in the past.
5. Traders currently are used to trading FCPO, so, FUPO with extra currency variability will take some time to get used to (although 2 months might be more than enough time for some to get used to it, other things equal).
6. According to Dreamy, Singapore also trades FCPO in US$ but not very successfully.
7. FCPO most popular month contracts tend to be bunched and skewed hugely in just one month, which is usually the 3rd month and it is very visible compared to the other contract months. On the other hand, it is unclear whether the coming FUPO volume will have similar shape, or flatter across contract months.
8. Dreamy thinks that if local producers with physical oil don't participate in FUPO, then, it might not be as attractive as FCPO, although traders in general would tend to dominate futures volume than true hedgers.
In short, many reasons to support both sides of the fence.
For some reason, testosterone levels must have been high during that discussion, because we ended up with some rather "playful" bets and ended up forming teams! Dali's supporters included Moolah, naruto and ckkuan, and Dreamy's supporters included juicy and ivtac. And to balance the numbers, I lended my support to Dreamy - All in the name of good fun between the boys!
And the prize for the winner? Well, I'm personally not clear exactly now, but between Dali and Dreamy, one of them will apologize to the other every single day for a week for something like that (I'll leave this between Dali and Dreamy to sort out the details). And as for the supporters, well, apparently, the losers will address the winners as "xifu" also everyday for a week! LOL! The things we do in good fun!
So, I hope I've documented this blog capsule accurately. If not, do drop a short comment to correct me here.
Cheers, and good luck to both teams come Wednesday, November 5, 2008!