If you are bearish on rubber, you can profit from a fall in rubber price by taking up a short position in the rubber futures market. You can do so by selling (shorting) one or more rubber futures contracts at a futures exchange.
You decide to go short one near-month TOCOM Rubber Futures contract at the price of JPY 133.00/kg. Since each Rubber futures contract represents 5000 kilograms of rubber, the value of the contract is JPY 665,000. To enter the short futures position, you have to put up an initial margin of JPY 75,000.
A week later, the price of rubber falls and correspondingly, the price of TOCOM Rubber futures drops to JPY 119.70 per kilogram. Each contract is now worth only JPY 598,500. So by closing out your futures position now, you can exit your short position in Rubber Futures with a profit of JPY 66,500.
|Short Rubber Futures Strategy: Sell HIGH, Buy LOW|
|SELL 5000 kilograms of rubber at JPY 133.00/kg||JPY 665,000|
|BUY 5000 kilograms of rubber at JPY 119.70/kg||JPY 598,500|
|Investment (Initial Margin)||JPY 75,000|
|Return on Investment||89%|
In the examples shown above, although rubber 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 rubber 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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