Forecasting Value at Risk for Malaysian Palm Oil using Monte Carlo Simulation

Abstract

Malaysia is well-known as one of the world’s leading exports of its crude palm oil. Thus, palm oil industry is one of the main contributors in Malaysia economic growth. The volatility of crude palm oil (CPO) prices is directly being affected by the demand from its primary importing countries such as European Union, Pakistan, China, US and India. Due to uncertainty in palm oil market prices, therefore it is crucial for this industry to measure and forecast the risk efficiently. The objectives of this study are to forecast the oil prices using Monte Carlo simulation and to compute future Value at Risk (VaR). The result obtained indicate that Monte Carlo provides a flexible and accurate approach for forecasting VaR. Hence, by analyzing the VaR of this volatile oil price environment has very important implications to any market participants especially risk managers and financial institutions when designing risk management strategies within this palm oil industry.