If you are bearish on soybeans, you can profit from a fall in soybeans price by taking up a short position in the soybeans futures market. You can do so by selling (shorting) one or more soybeans futures contracts at a futures exchange.
You decide to go short one near-month CBOT Soybeans Futures contract at the price of USD 9.6900/bu. Since each Soybeans futures contract represents 5000 bushels of soybeans, the value of the contract is USD 48,450. To enter the short futures position, you have to put up an initial margin of USD 4,725.
A week later, the price of soybeans falls and correspondingly, the price of CBOT Soybeans futures drops to USD 8.7210 per bushel. Each contract is now worth only USD 43,605. So by closing out your futures position now, you can exit your short position in Soybeans Futures with a profit of USD 4,845.
|Short Soybeans Futures Strategy: Sell HIGH, Buy LOW|
|SELL 5000 bushels of soybeans at USD 9.6900/bu||USD 48,450|
|BUY 5000 bushels of soybeans at USD 8.7210/bu||USD 43,605|
|Investment (Initial Margin)||USD 4,725|
|Return on Investment||102.5397%|
In the examples shown above, although soybeans prices have moved by only 10%, the ROI generated is 0.0000%. This leverage is made possible by the relatively low margin (approximately 9.7523%) required to control a large amount of soybeans 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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