If you are bullish on rapeseed, you can profit from a rise in rapeseed price by taking up a long position in the rapeseed futures market. You can do so by buying (going long) one or more rapeseed futures contracts at a futures exchange.
You decide to go long one near-month Euronext Rapeseed Futures contract at the price of EUR 292.50 per tonne. Since each Euronext Rapeseed Futures contract represents 50 tonnes of rapeseed, the value of the futures contract is EUR 14,625. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of EUR 1,300 to open the long futures position.
Assuming that a week later, the price of rapeseed rises and correspondingly, the price of rapeseed futures jumps to EUR 321.75 per tonne. Each contract is now worth EUR 16,088. So by selling your futures contract now, you can exit your long position in rapeseed futures with a profit of EUR 1,463.
|Long Rapeseed Futures Strategy: Buy LOW, Sell HIGH|
|BUY 50 tonnes of rapeseed at EUR 292.50/ton||EUR 14,625|
|SELL 50 tonnes of rapeseed at EUR 321.75/ton||EUR 16,088|
|Investment (Initial Margin)||EUR 1,300|
|Return on Investment||113%|
In the examples shown above, although rapeseed prices have moved by only 10%, the ROI generated is 113%. This leverage is made possible by the relatively low margin (approximately 9%) required to control a large amount of rapeseed 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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