A Hedger Takes a Long Position in an Oil Futures

question 2

Short Answer

A hedger takes a long position in an oil futures contract on April 1 2014 to hedge an exposure on September 1 2014. The initial futures price is $60. On June 30 2014, the futures price is $61. On September 1 2014, it is $64. The contract is closed out on September 1 2014. What gain is recognised in the financial year July 1 2013 to June 30 2014? Each contract is on 1,000 barrels of oil. _ _ _ _ _ _

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Definitions:

Cost

The value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore.

Revaluation

An adjustment of the value of an asset to reflect its current market value rather than its cost value.

Useful Life

The estimated period over which an asset is expected to be usable by a company before it is fully depreciated.

Depreciation

The systematic allocation of the cost of a tangible asset over its useful life, reflecting the asset's consumption or wear and tear.