2.23, Suppose that, on October 24, 2018, a company sells one April 2019 live cat

Question

2.23, Suppose that, on October 24, 2018, a company sells one April 2019 live cattle futures contract. It closes out its position on January 21, 2019. The futures price (per pound) is 121.20 cents when it enters into the contract, 118.30 cents when it closes out its position, and 118.80 cents at the end of December 2018. One contract is for the delivery of 40,000 pounds of cattle. What is the total profit? How is it taxed if the company is (a) a hedger and (b) a speculator? Assume that the company has a December 31 year end

Explanation / Answer

Total Profit

= $40000*(1.2120-1.1830)

= $ 1160

For hedger it will be taxed in year 2018

= $40000*(1.2120-118.80) = $ 960

For Speculator it will be taxed in year 2019.

$40000*(1.188-1.183) =$200

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