question archive A speculator takes a long position in a futures contract on a commodity on November 1, 2012 to hedge an exposure on March 1, 2013
A speculator takes a long position in a futures contract on a commodity on November 1, 2012 to hedge an exposure on March 1, 2013
Subject:FinancePrice:2.86 Bought15
A speculator takes a long 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 $60. On December 31, 2012 the futures price is $61. On March 1, 2013 it is $64. The contract is closed out on March 1, 2013. What gain is recognized in the accounting year January 1 to December 31, 2013? Each contract is on 1000 units of the commodity.
I already knew the answer is ($64-61)*1,000=$3,000 My question is, why for a speculator we are using $61 instead of the initial futures price: $60?
And why would changing this question to a Hedger (the rest of the answer stays the same), results in a different answer (for a hedger, his profit should be (64-60)*1,000=4,000)? Basically, I would like to know why the gain is different for a speculator and a hedger?
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ANSWER
$3,000
In this case there is no hedge accounting. Gains or losses are accounted for as they are accrued. The price per unit increases by $3 in 2013. The total gain in 2013 is therefore $3,000.
why for a speculator we are using $61 instead of the initial futures price: $60?
Because it is a futures contract so futures price is taken not spot price
I would like to know why the gain is different for a speculator and a hedger?
Hedger in this case will buy in spot at 60 and sell in futures 64 which is called as hedge , a naked position being filled by opposite position of different kind
