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  • 4.4.4-COTTON TRADING-LEVERAGE

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  • Leverage

    Chapter 4 - Cotton trading - Cotton futures and options – ICE Futures U.S. 

     
     
    Cotton futures contracts are leverage instruments, meaning that a trader does not pay the full market price for each contract. Instead, futures traders pay a small portion of the contract’s total value (usually less than 10%) in the form of margin, a good faith deposit to ensure contract performance. An ICE Cotton No. 2 contract at 50 cents per pound. would be worth $25,000 (each contract is for 50,000 pounds of cotton). The margin requirement for each contract might be $1,200 for a speculator or $900 for a hedger. For ten contracts, a speculator might post $12,000 in margin, representing $250,000 worth of contracts. If the market moves against the trader’s position by 1 cent per pound on any given day, it would require payment of a total of $5,000 in variation margin. If the market had moved in a positive direction, of course, the trader will have the same amount in profit from the day’s activity. Margin calls can be a regular feature of holding a futures position and must be factored into any trading plan.

    The purchase of options does not require the posting of margin, another part of their appeal to traders.