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 $100,000 profit on a $50,000 investment, a return of 200%.

 

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 a $50,000 investment.