Question

1. One orange juice futures contract is on 15,000 pounds of frozen concentrate. Suppose that in September 2016 you sell a March 2018 orange juice futures contract for 120 cents per pound. The futures price is 140 cents in December 2016 and 110 cents in December 2017. You close out the position at 125 cents per pound in February 2018.

1. What is your gain or loss in December 2016?

2. What is your gain or loss when you close out the position?

3. What is your gain or loss between December 2016 and December 2017?

Answer 1

It is a short position

Initial futures price = 120 cents per pound

1. What is your gain or loss in December 2016?

Gain = (Initial futures price - Futures price in December 2016) * 15,000

Gain = (120 - 140) * 15,000

Gain = -300,000 cents or -$3,000

In other words a loss of $3,000

2. What is your gain or loss when you close out the position?

Gain = (Initial futures price - Futures priceat the close) * 15,000

Gain = (120 - 125) * 15,000

Gain = -75,000 cents or -$7,500

A loss of $7,500

3. What is your gain or loss between December 2016 and December 2017?

Gain = (Futures price in Dec 2016 - Future price in Dec 2017)

Gain = (140 - 110) * 15,000

Gain = 450,000 cents

Gain = $4,500