If you are bullish on cocoa, you can profit from a rise in cocoa price by taking up a long position in the cocoa futures market. You can do so by buying (going long) one or more cocoa futures contracts at a futures exchange.
You decide to go long one near-month Euronext Cocoa Futures contract at the price of GBP 1,812 per tonne. Since each Euronext Cocoa Futures contract represents 10 tonnes of cocoa, the value of the futures contract is GBP 18,120. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of GBP 1,350 to open the long futures position.
Assuming that a week later, the price of cocoa rises and correspondingly, the price of cocoa futures jumps to GBP 1,993 per tonne. Each contract is now worth GBP 19,932. So by selling your futures contract now, you can exit your long position in cocoa futures with a profit of GBP 1,812.
|Long Cocoa Futures Strategy: Buy LOW, Sell HIGH|
|BUY 10 tonnes of cocoa at GBP 1,812/ton||GBP 18,120|
|SELL 10 tonnes of cocoa at GBP 1,993/ton||GBP 19,932|
|Investment (Initial Margin)||GBP 1,350|
|Return on Investment||134%|
In the examples shown above, although cocoa prices have moved by only 10%, the ROI generated is 134%. This leverage is made possible by the relatively low margin (approximately 7%) required to control a large amount of cocoa represented by each contract.
Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.
To buy or sell futures, you need a broker that can handle futures trades.
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