Currency Fund Hard Merck

Posted onDecember 05, 2011 - 10:17 am by Admin | 0 Comments

A Small Margin Controls a Large Futures Contract

Futures-traded commodity contracts are highly leveraged financial instruments. Traders can enjoy large profits with a relatively small investment called margin. As with real estate, where a modest down payment can control a property whose value is many times greater, margin enables traders to manage a futures position with much more inherent value. A gold contract worth $75,000 can be traded with an initial margin of about $3,500, an $85,000 crude oil contract with only $4,050, an $18,000 corn contract for only $1,080. Popular—and volatile—Forex (foreign currency exchange) contracts that are often day traded, such as the Euro, British Pound or Japanese Yen, enjoy similar leverage.

Commodity Futures Are Highly Leveraged and Volatile

Compared to real estate (and investments like stocks or bonds) commodity futures are highly volatile. Commodity prices sometimes double or halve in mere weeks. Traders on the right side of the market—with long positions when futures prices rise, or short positions when prices fall—profit, often quickly and handsomely. But the reverse is equally possible: those on the wrong side of the market—with long positions when prices fall, or short positions when prices rise—suffer losses, often significant. Occasionally, in unusually volatile locked or limit markets, traders temporarily are barred from exiting their positions, during which time profits soar, or losses mount.

The arithmetic of leverage is seductive: with a small “down payment” (margin) a trader can reap a huge profit. For example, when gold rose $100 per ounce between August and October, 2007, a trader long the commodity would have profited $10,000 per contract in two months. However, a speculator short gold would have lost exactly as much.


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