Question

One orange juice future contract is on 15,000poundsof frozen concentrate. Suppose that in September 2016a company sells a March 2018orange juice futures contract for 120 cents per pound. In December 2016,the futures price is 140 cents. In December 2017,the futures price is 110 cents. In February 2018,the futures price is 125 cents. The company hasa December year end. What is the company's profit or loss on the contract

Answer 1

The company's profit or loss on the orange juice futures contract would be determined by the contract's final settlement price in March 2018. The provided price points show potential unrealized gains or losses, but the actual profit or loss is realized only at expiration or upon closing the position.

Step-by-step explanation:

In September 2016, the company sells a March 2018 orange juice futures contract for 120 cents per pound. To calculate the company's profit or loss on the contract at different points, we measure the difference in price from the sale price (120 cents per pound).

• December 2016: Futures price is 140 cents, which is 20 cents higher than the sale price, resulting in an unrealized loss if they were to close the position. However, the contract has not yet matured.
• December 2017: Futures price is now 110 cents, 10 cents lower than the sale price, leading to an unrealized gain compared to the original contract.
• February 2018: Futures price is 125 cents, which is 5 cents higher than the sale price, signifying an unrealized loss at this price point if the contract were to be closed.

However, to realize the actual profit or loss, one would need the final settlement price of the futures contract at the expiration date in March 2018. The company's profit or loss on the contract can only be determined based on the actual sale or purchase that takes place at the contract's expiration at the future date mentioned. It's worth noting that futures are typically marked to market daily, so actual gains or losses can vary daily until the contract is closed or expires.

The example provided in the question does not include the exact expiration outcome and typically companies would need to account for such contracts as per financial reporting standards, which may include recognizing unrealized gains or losses depending on the valuation at the company's year end.

Answer 2

The company's loss on the contract is $750.

Step-by-step explanation:

a) Data and Calculations:

Future Contract of 15,000 pounds frozen concentrate:

March 2018 orange juice futures price = 120 cents per pounds

December 2016, the futures price = 140 cents

December 2017, the futures price = 110 cents

February 2018, the futures price = 125 cents

Loss on futures contract = (125 - 120) * 15,000 = $750

b) This futures contract for frozen concentrate is a contract between two parties where both parties agree to sell and buy 15,000 pounds of frozen concentrate at a predetermined price of 120 cents per pound in March 2018, although the contract was entered into in September 2016.