Leveraging Investments

Leveraging means that you are getting a greater exposure to an asset than you would otherwise have if you just used your own money.

The borrowing strategies we have just looked at are examples of leveraging. Two other ways of leveraging are through futures contracts and option contracts.

A futures contract is an agreement to trade something of value at a specific time in the future.

The contract is a derivative in that it derives its value from the underlying good such as gold, copper, wheat or sheep.

Trading in futures contracts is a complex process; however, we will provide you a brief overview.

Let’s say you wanted to lock in the price of gold for a transaction that will take place in 12 months' time. In 12 months you want to buy 1,000 bars of gold at $500 each, which is a transaction worth $500,000.