Suppose that on October 24, 2013, a company sells one April 2014 live-cattle fut

Question

Suppose that on October 24, 2013, a company sells one April 2014 live-cattle futures contract. It closes out its position on January 21, 2014. The futures price (per pound) is 91.20 cents when it enters into the contract, 88.30 cents when it closes out the position and 88.80 cents at the end of December 2013. One contract is for the delivery of 40,000 pounds of cattle.

What is the profit?

How is it taxed if the company is (a) a hedger and (b) a speculator? Assume that the company has a December 31 year end.

Explanation / Answer

The total profit is

40,000 × (0.9120 – 0.8830) = $1,160

( Total amount * Difference of opening and closing bid)

a) If the company is a hedger than the whole profit is taxed in 2013. (at the time of realization of profit)

b) If it is a speculator 40,000 x (0.9120 - 0.8880) = $960 is taxed in 2013 (the year of entering into the contract)

and 40,000 x (0.8880 - 0.8830) = $200 is taxed in 2014. ( at the time of closing of the contract)

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