Question

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.

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

Answer 1

The company takes a loss of $3,000 in December 2016.

Step-by-step explanation:

A future contract is the contract between two parties (sellers and buyers), in which the sellers agree to sell goods to the buyers at a specific future date, at specific future price and the buyers are obliged to execute the contract.

Gain or loss on the sale = Future contract concentrate x (Future price 2016 - Orange juice contract price)

Gain or loss on the sale = 15,000 pounds x ($1.4 - $1.2)

Gain or loss on the sale = 15,000 pounds x 0.2

The company takes a loss of $3,000 in December 2016. Same method applies to December 2017 - only substitute the future price 2016 to 2017, every other thing remains the same.