If you are bullish on tin, you can profit from a rise in tin price by taking up a long position in the tin futures market. You can do so by buying (going long) one or more tin futures contracts at a futures exchange.
You decide to go long one near-month LME Tin Futures contract at the price of USD 11,550 per tonne. Since each LME Tin Futures contract represents 5 tonnes of tin, the value of the futures contract is USD 57,750. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 11,700 to open the long futures position.
Assuming that a week later, the price of tin rises and correspondingly, the price of tin futures jumps to USD 12,705 per tonne. Each contract is now worth USD 63,525. So by selling your futures contract now, you can exit your long position in tin futures with a profit of USD 5,775.
|Long Tin Futures Strategy: Buy LOW, Sell HIGH|
|BUY 5 tonnes of tin at USD 11,550/ton||USD 57,750|
|SELL 5 tonnes of tin at USD 12,705/ton||USD 63,525|
|Investment (Initial Margin)||USD 11,700|
|Return on Investment||49%|
In the examples shown above, although tin prices have moved by only 10%, the ROI generated is 49%. This leverage is made possible by the relatively low margin (approximately 20%) required to control a large amount of tin 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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