Explanation:
Since the trader does not use hedge accounting, then we have,
That is, there is a loss of USD 5,000 in the first year.
That is, there is a profit of USD 10,000 in the second year.
And finally, we have,
That is, there is a profit of USD 5,000 in the third year. (Note: The text states "second year" in the final sentence by typo, but refers to the 3rd year calculation.)
Note that, all the total profit of USD 10,000, that is, can only be realized in the third year if the trader uses hedge accounting.
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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.