Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 99

in gold or convergence to a lower price. The more volatile the underlying commodity, the higher the initial and maintenance margins may be since the risk of potential loss is greater. At this point one of three scenarios could happen:

  • The price of gold may start moving higher at such a pace that your contracts increase in value. Let's assume that in one month your contracts will be worth $320/oz. Now you have built-in equity by $10/oz. ($320-$310), for a total of $10,000. Clearly a good situation. And at this point you are comfortably meeting your maintenance margin requirements given your $10,000 equity. You may even decide to partially or fully offset your position by selling the contracts and lock in a profit.
  • The price of gold may start moving higher but at a slow pace, such that your contracts stay more or less at the same price level and finally reach $310/ounce at the delivery date (remember convergence). In this case you have a wash - no profits and no losses (not counting the commissions of course). At maturity your long position is automatically settled by your broker, if you haven't settled already, and you end up even.
  • Gold prices may stay steady or head lower, in which case there will an erosion in your contracts' worth. Remember that as you get closer to the delivery date, your contracts' value begin to converge to the spot price of gold, in this case losing value. So if gold was worth $300/oz. at your time of contract purchase and didn't move at all, the futures contracts will start heading towards the $300/oz. as time passes. Of course the contracts' price will drop even more if the price of gold moves lower. Clearly a bad situation.Now you enter a loss condition, whereby you are below your original investment. For example, if your contracts move to $308/oz. you are down $2,000 and your account will be worth $4,200 which is $800 below the $5,000

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Copyright and Disclaimer
Book Chapters
Table of Contents Copyright and Disclaimer Foreword Money
Bonds Futures Stocks Options
Mutual Funds Retirement Final Words Appendix A

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