Futures example

The actual agreement requires you to pay 10% of the contract value as a deposit.

Your out of pocket investment is $50,000 for a transaction worth 10 times that amount.

After 12 months the price of gold bars goes to $600 each, but you have the contract to buy them at $500.

Therefore you saved (or made) 1,000 x ($600 - $500), which is $100,000.

You made a $100,000 return on a $50,000 investment. Your overall profit is $50,000 ($100,000 minus the original $50,000 deposit), or 100% of your initial investment amount.

If the price dropped to $400 each, when the contract expires you have to buy 1,000 gold bars for $500 each.

With the price after 12 months at $400, you have cost yourself 1,000 x ($500 - $400), which is $100,000.

You have lost $100,000 on your investment, or 200% of your initial investment amount.