Debt Management and Leverage
Futures contracts
Futures example
The actual agreement requires you to pay 10% of the contract value as a deposit.
Your out of pocket investment is $50,000 for a transaction worth 10 times that amount.
After 12 months the price of gold bars goes to $600 each, but you have the contract to buy them at $500.
Therefore you saved (or made) 1,000 x ($600 – $500), which is $100,000.
You made a $100,000 return on a $50,000 investment. Your overall profit is $50,000 ($100,000 minus the original $50,000 deposit), or 100% of your initial investment amount.
If the price dropped to $400 each, when the contract expires you have to buy 1,000 gold bars for $500 each.
With the price after 12 months at $400, you have cost yourself 1,000 x ($500 – $400), which is $100,000.
You have lost $100,000 on your investment, or 200% of your initial investment amount.
