Page 14 - NEW FOREX FULL COURSE

FOREX TRADING COURSE FOR BEGINNERS

VALUE OF 40,000
PARTICIPANTS PRICE PER POUND
POUND CONTRACT
Sell 1 April Live Cattle $26,000
JANUARY 60 CENTS
futures contract
Buy 1 April Live Cattle $24,000
MARCH 65 CENTS
futures contract
GAIN 5 CENTS $2.000

Price per
Assume you were wrong. Instead of decreasing, the April live cattle futures price increases - to,
say, 70 cents a pound by the time in March when you eventually liquidate your short futures
position through an offsetting purchase. The outcome would be as follows:

VALUE OF 40,000
PARTICIPANTS PRICE PER POUND
POUND CONTRACT
Sell 1 April Live Cattle $26,000
JANUARY 65 CENTS
futures contract
Buy 1 April Live Cattle $28,000
MARCH 70 CENTS
futures contract
LOSS 5 CENTS $2.000

In this example, the loss of 5 cents a pound on the futures transaction resulted in a total loss of
the $2,000 you deposited as initial margin plus transaction costs.

SPREADS

While most speculative futures transactions involve a simple purchase of futures contracts to
profit from an expected price increase, or an equally simple sale to profit from an expected rice
decrease, numerous other possible strategies exist. Spreads are one example.

A spread, at least in its simplest form, involves buying one futures contract and selling another
futures contract. The purpose is to profit from an expected change in the relationship between
the purchase price of one and the selling price of the other.

As an illustration, assume it's now November, the March wheat futures price is presently $3.10 a
bushel and the May wheat futures price is presently $3.15 a bushel, a difference of 5 cents.

Your analysis of market conditions indicates that, over the next few months, the price difference
between the two contracts will widen to become greater than 5 cents. To profit if you are right,
you could sell the March futures contract (the lower priced contract) and buy the May futures
contract (the higher priced contract).
Assume time and events prove you right and that, by February, the March futures price has risen
to $3.20 and May futures price is $3.35, a difference of 15 cents. By liquidating both contracts at
this time, you can realize a net gain of 10 cents a bushel. Since each contract is 5,000 bushels, the
total gain is $500.

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