If you are bearish on corn, you can profit from a fall in corn price by taking up a short position in the corn futures market. You can do so by selling (shorting) one or more corn futures contracts at a futures exchange.
You decide to go short one near-month Euronext Corn Futures contract at the price of EUR 129.25/ton. Since each Corn futures contract represents 50 tonnes of corn, the value of the contract is EUR 6,463. To enter the short futures position, you have to put up an initial margin of EUR 700.00.
A week later, the price of corn falls and correspondingly, the price of Euronext Corn futures drops to EUR 116.33 per tonne. Each contract is now worth only EUR 5,816. So by closing out your futures position now, you can exit your short position in Corn Futures with a profit of EUR 646.25.
|Short Corn Futures Strategy: Sell HIGH, Buy LOW|
|SELL 50 tonnes of corn at EUR 129.25/ton||EUR 6,463|
|BUY 50 tonnes of corn at EUR 116.33/ton||EUR 5,816|
|Investment (Initial Margin)||EUR 700.00|
|Return on Investment||92%|
In the examples shown above, although corn prices have moved by only 10%, the ROI generated is 0%. This leverage is made possible by the relatively low margin (approximately 11%) required to control a large amount of corn 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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