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Suppose that in September 2018 a company takes a long position in a contract on May 2019 crude oil futures. It closes out its position in March 2019. The futures price (per barrel) is $48.30 when it enters into the contract, $50.50 when it closes out its position, and $49.10 at the end of December 2018. One contract is for the delivery of 1,000 barrels. What is the company’s total profit? When is it realized? How is it taxed if it is (a) a hedger and (b) a speculator? Assume that the company has a December 31 year end.

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Answer:

The company total profit is $2,200

The realization of the $2,200 total profit will be on the day-to-day basis with the time frame as followed:

- $800 will be realized in the 2018 ( from September to end of the year);

- $1,400 will be realized in 2019 ( from the begining of 2019 to the time the position is closed.

(a) A Hedger will be taxed on his/her $2,200 profit on the year of 2019;

(b) A Speculator will be taxed on his/her $2,200 profit right it is realized. In other words, $800 of profit will be taxed in 2018 and 1,400 of profit will be taxed in 2019.

Explanation:

- The total profit is calculated as: ($50.50-$48.30) x 1,000 = $2,200;

- The profit realized in 2018 is calculated as ( $49.10-$48.30) x 1,000 =$800;  

- The profit realized in 2019 is calculated as ( $50.50-$49.10) x 1,000 =$1,400.

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