FMP Question

chitra.rao
Posts: 1
Joined: Wed Jan 06, 2016 5:22 am

FMP Question

Postby chitra.rao » Mon Feb 01, 2016 6:29 am

Hi,

In Mechanics of Futures Markets, there is a question : What is the difference in accounting and tax treatment of a futures transaction if the company is classified as a "hedger" and a "speculator" ?

Can some one please get back on this.

Thanks
Chitra

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edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: FMP Question

Postby edupristine » Tue Feb 09, 2016 5:29 am

Hi it would be better if you look at practical example:-

Just look at this one-
One orange juice future contract is on 15,000 pounds of frozen concentrate. Suppose that in September 2011 a company sells a March 2013 orange juice futures contract for 120 cents per pound. In December 2011 the futures price is 140 cents. In December 2012 the futures price is 110 cents. In February 2013 it is closed out at 125 cents. The company has a December year end. What is the company's profit or loss on the contract? How is it realized? What is the accounting and tax treatment of the transaction if the company is classified as a) a hedger and b) a speculator?

Answer:

The price goes up during the time the company holds the contract from 120 to 125 cents per pound. Overall the company therefore takes a loss of 15,000×0.05 = $750. If the company is classified as a hedger this loss is realized in 2013, If it is classified as a speculator it realizes a loss of 15,000×0.20 = $3000 in 2011, a gain of 15,000×0.30 = $4,500 in 2012, and a loss of 15,000×0.15 = $2,250 in 2013.


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