On 31 October 2012 DGC Investment Ltd purchased a well diversified portfolio of shares that it is intending to sell in three months time. To hedge against the adverse movements in price of these shares, on the same date, the manager obtained four "sell" contracts with DSI Futures. A deposit of $20,000 was required by the broker for the futures contract. A standard futures contract is $25 per basis point.
On 31 January 2013, DGC Investment Ltd sold the portfolio and closed out all four contracts.
The following information is provided.

What is the financial effect of the above transactions on the statement of comprehensive income of DGC Investment Ltd for the reporting period ending 31 December 2012, respectively?
A. Decrease by $5 000;
B. Decrease by $15 000;
C. Increase by $5 000;
D. Increase by $10 000;
E. No effect; No effect.

Question

On 31 October 2012 DGC Investment Ltd purchased a well diversified portfolio of shares that it is intending to sell in three months time. To hedge against the adverse movements in price of these shares, on the same date, the manager obtained four "sell" contracts with DSI Futures. A deposit of $20,000 was required by the broker for the futures contract. A standard futures contract is $25 per basis point.
On 31 January 2013, DGC Investment Ltd sold the portfolio and closed out all four contracts.
The following information is provided.
  
What is the financial effect of the above transactions on the statement of comprehensive income of DGC Investment Ltd for the reporting period ending 31 December 2012, respectively? 
A. Decrease by $5 000;
B. Decrease by $15 000;
C. Increase by $5 000;
D. Increase by $10 000;
E. No effect; No effect.

Quizplus · Accepted Answer

The purchase of the portfolio is not relevant to the statement of comprehensive income for the reporting period ending 31 December 2012. However, the deposit of $20,000 for the futures contracts results in an outflow of cash and a decrease in the statement of comprehensive income by $15,000 ($20,000 deposit ÷ $25 per basis point × 600 basis points per contract × 4 contracts). When the contracts are closed out on 31 January 2013, any gains or losses will be realized in the new reporting period.

On 31 October 2012 DGC Investment Ltd Purchased a Well