If you are bullish on zinc, you can profit from a rise in zinc price by taking up a long position in the zinc futures market. You can do so by buying (going long) one or more zinc futures contracts at a futures exchange.
You decide to go long one near-month LME Zinc Futures contract at the price of USD 1,212 per tonne. Since each LME Zinc Futures contract represents 25 tonnes of zinc, the value of the futures contract is USD 30,300. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 5,000 to open the long futures position.
Assuming that a week later, the price of zinc rises and correspondingly, the price of zinc futures jumps to USD 1,333 per tonne. Each contract is now worth USD 33,330. So by selling your futures contract now, you can exit your long position in zinc futures with a profit of USD 3,030.
|Long Zinc Futures Strategy: Buy LOW, Sell HIGH|
|BUY 25 tonnes of zinc at USD 1,212/ton||USD 30,300|
|SELL 25 tonnes of zinc at USD 1,333/ton||USD 33,330|
|Investment (Initial Margin)||USD 5,000|
|Return on Investment||61%|
In the examples shown above, although zinc prices have moved by only 10%, the ROI generated is 61%. This leverage is made possible by the relatively low margin (approximately 17%) required to control a large amount of zinc 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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