If you are bearish on rapeseed, you can profit from a fall in rapeseed price by taking up a short position in the rapeseed futures market. You can do so by selling (shorting) one or more rapeseed futures contracts at a futures exchange.
You decide to go short one near-month Euronext Rapeseed Futures contract at the price of EUR 292.50/ton. Since each Rapeseed futures contract represents 50 tonnes of rapeseed, the value of the contract is EUR 14,625. To enter the short futures position, you have to put up an initial margin of EUR 1,300.
A week later, the price of rapeseed falls and correspondingly, the price of Euronext Rapeseed futures drops to EUR 263.25 per tonne. Each contract is now worth only EUR 13,163. So by closing out your futures position now, you can exit your short position in Rapeseed Futures with a profit of EUR 1,463.
|Short Rapeseed Futures Strategy: Sell HIGH, Buy LOW|
|SELL 50 tonnes of rapeseed at EUR 292.50/ton||EUR 14,625|
|BUY 50 tonnes of rapeseed at EUR 263.25/ton||EUR 13,163|
|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 0%. 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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