Explanation:
If a trader does not use hedge accounting, futures contracts are marked-to-market at the end of each accounting period, and profits/losses are realized periodically.
Ultimate access to all questions.
No comments yet.
Q.10 Suppose that a trader enters into a two-year futures contract to buy 1000 barrels of oil in June for USD 40 per barrel. The futures price is USD 35, and USD 45 at the end of the 1st, and the 2nd calendar years. If the contract is closed in June of the third calendar year, at USD 50, what is the accounting for the profit or losses from the trade each year if the trader does not use hedge accounting?
A
There is a loss of USD 5,000 in the 1st year, a profit of USD 10,000 in the 2nd year, and a profit of USD 5,000 in the 3rd year.
B
There is a loss of USD 5,000 in the 1st year, a profit of USD 5,000 in the 2nd year, and a profit of USD 5,000 in the 3rd year.
C
All the total loss of USD 5,000 is realized in the third year.
D
All the total profit of USD 10,000 is realized in the third year.