Question

A speculator takes a short position in a futures contract on a commodity on November 1, 2012 to hedge an exposure on March 1, 2013. The initial futures price is $61. On December 31, 2012 the futures price is $63. On March 1, 2013 it is $59. The contract is closed out on March 1, 2013. What gain/loss is recognized in the accounting year January 1 to December 31, 2013? Each contract is on 1000 units of the commodity.

Answer 1

The investor entered short position which means he is going to settle with a counter buy on the expiry date

on Dec 31 2012 the futures prices increased which means the when the counter buy at $63 he would incurred a loss of $2000 which will shown in books with unrealized loss thus making $63 new future sell price. on March 1 2013 the futures price falls making counter buy rate at $59

What gain/loss is recognized in the accounting year January 1 to December 31, 2013?

Gain = Units in contract * (future sell price on December 31 - future counter buy price on march 1)

Gain = 1000 * (63 - 59)

Gain as per accounting records = $4000