Hello, could you please help me with the solution of this problem step by step?

Question

Hello, could you please help me with the solution of this problem step by step?

Suppose that in Sep.2015 a company takes a long position in a contract on May 2016 crude oil futures.It closes out its position in March 2016.The futures price is $88.30 when it enteres into the contract,$90.50 when it closes out its position,$89.10 at the end of Dec.2015.The contract is for the delivery of 1000 barrels.What is the company's total profit?When is it realized?How is it taxed if it is (a) a hedger and (b) a speculator? Assume that the company has a Dec.31 year-end.

Explanation / Answer

Solution (a) As Hedger

Companys total profit = ( FP of March 16 - FP of September 15 ) * 1000 = (90.50 - 88.30)*1000

= 2.2*1000 = 2200

This is realised while closing position in march 2016 and taxed like an ordinary income in 2016

(b) As speculator

Profit first at the December 15 is = (FP of Dec 15 - FP of Sep. 15) * 1000

= (89.10 - 88.30) * 1000 = 0.8*1000 = 800

Second profit while closing position in March 2016

(FP of march 16 - FP of Dec 15 ) * 1000 = (90.5 - 89.10) * 1000 = 1.4*1000 = 1400

The profit of 800 taxed in 2015 and the profit of 2200 in the year 2016

Hope this answer will help you and feel free to ask any query through comments and vote.

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