If you are bullish on copper, you can profit from a rise in copper price by taking up a long position in the copper futures market. You can do so by buying (going long) one or more copper futures contracts at a futures exchange.
You decide to go long one near-month LME Copper 'A' Grade Futures contract at the price of USD 3,171 per tonne. Since each LME Copper 'A' Grade Futures contract represents 25 tonnes of copper, the value of the futures contract is USD 79,275. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 15,000 to open the long futures position.
Assuming that a week later, the price of copper rises and correspondingly, the price of copper futures jumps to USD 3,488 per tonne. Each contract is now worth USD 87,203. So by selling your futures contract now, you can exit your long position in copper futures with a profit of USD 7,928.
|Long Copper Futures Strategy: Buy LOW, Sell HIGH|
|BUY 25 tonnes of copper at USD 3,171/ton||USD 79,275|
|SELL 25 tonnes of copper at USD 3,488/ton||USD 87,203|
|Investment (Initial Margin)||USD 15,000|
|Return on Investment||53%|
In the examples shown above, although copper prices have moved by only 10%, the ROI generated is 53%. This leverage is made possible by the relatively low margin (approximately 19%) required to control a large amount of copper 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.
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