If you are bullish on rice, you can profit from a rise in rice price by taking up a long position in the rice futures market. You can do so by buying (going long) one or more rice futures contracts at a futures exchange.
You decide to go long one near-month CBOT Rough Rice Futures contract at the price of USD 13.71 per hundredweight. Since each CBOT Rough Rice Futures contract represents 2000 hundredweights of rice, the value of the futures contract is USD 27,420. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 2,430 to open the long futures position.
Assuming that a week later, the price of rice rises and correspondingly, the price of rice futures jumps to USD 15.08 per hundredweight. Each contract is now worth USD 30,162. So by selling your futures contract now, you can exit your long position in rice futures with a profit of USD 2,742.
|Long Rice Futures Strategy: Buy LOW, Sell HIGH|
|BUY 2000 hundredweights of rice at USD 13.71/cwt||USD 27,420|
|SELL 2000 hundredweights of rice at USD 15.08/cwt||USD 30,162|
|Investment (Initial Margin)||USD 2,430|
|Return on Investment||112.84%|
In the examples shown above, although rice prices have moved by only 10%, the ROI generated is 112.84%. This leverage is made possible by the relatively low margin (approximately 8.86%) required to control a large amount of rice 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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