DSM080: Financial Markets, Assignment, UOL, Singapore: A grapefruit juice futures contract is for 15,000 pounds of frozen grapefruit juice

Question 4

A grapefruit juice futures contract is for 15,000 pounds of frozen grapefruit
juice. Suppose that in September 2016 a company sells a March 2018 grapefruit juice futures contract for $2.40 per pound. In December 2016 the
futures price is $2.80; in December 2017 the futures price is $2.20; and in February 2018 the contract is closed out at $2.50. The firm’s accounts have a
December year end.

(a) What does it mean to “close out” a short position in a futures contract?

(b) What is the company’s profit or loss on the grapefruit juice futures
contract?

(c) How is the profit or loss realized if the company is classified as (i) a hedger
or (ii) a speculator?

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