financial leverage in the futures market;
In the commodity futures market, investors have financial leverage. In this market, the contracts of each asset have a leverage of 10 at the beginning; But according to market conditions and changes in guarantee funds, this amount fluctuates.
For a better understanding of the issue, pay attention to the following example.
In one working day, the price of each unit (gram) of Pushal saffron deposit certificate in the stock market (bonds) is equal to 8000 Tomans. Suppose Mr. Ahmadi wants to buy 1 kilo of saffron from the stock market.
The amount required to buy a kilo of saffron deposit certificate is as follows:
Purchase price: 8000 Tomans
Purchase amount: 1000 grams (each unit of saffron deposit certificate is 1 gram)
The amount required to buy a saffron deposit certificate = the price of a saffron deposit certificate x the amount of a saffron deposit certificate
8000000=8000×1000
Mr. Ahmadi should have 8 million in cash to buy a kilo of saffron from the stock market. (transaction fees are waived)
If Mr. Ahmadi wants to buy the same amount of saffron from the saffron futures market, how much cash will be required?
Considering that the size of the saffron futures contract is 100 grams, Mr. Ahmadi should buy 10 saffron futures contracts. In order to obtain 10 saffron futures contracts, he must deposit 10 times the initial guarantee amount of saffron futures contracts in cash to the operational account. Assuming that the guarantee amount of saffron future contracts is equal to 180 thousand tomans, the amount of money required to obtain 10 purchase positions in the future market will be as follows:
Amount required = number of contracts x initial guarantee amount
1,800,000=10×180,000
Mr. Ahmadi has to pay 1,800,000 Tomans to buy 1 kilo of saffron from the future saffron market. In fact, Mr. Ahmadi was able to buy 1 kilo of saffron in the saffron futures market with less capital than the stock market. This feature of the futures market is called leverage.
Therefore, instead of paying 8 million tomans, Mr. Ahmadi can buy 1 kilo of saffron by paying only 1,800,000.
Note: financial leverage is different with the size of the contract. The size of the contract has a fixed value that is determined in the contract specifications; But financial leverage is variable.
Mehdi Koh Soltani (financial services, accounting, financial and tax consultant):
Link to the audit accounting clinic
https://t.me/joinchat/BnzBsTuioTshiXBwf9bBPQ