CAF-2 · Chapter 7 · Question 3 of 15
XYZ Limited entered into a forward contract for the purchase of raw materials used in its manufacturing business to guard against loss through future price fluctuations. On maturity, the contract was settled by a cash payment without taking actual delivery of the raw materials. How is this transaction classified for tax purposes?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) C) It is excluded from the definition of a speculation business because it is a hedging contract for manufacturing.
Explanation
A contract in respect of raw materials entered into by a person in the course of a manufacturing business to guard against loss through future price fluctuations (hedging) is specifically excluded from the definition of "speculation business".
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