Chapter 34: Futures and Futures Options 655 
However, the point is that the businessman is able to substantially reduce the cur­
rency risk, since in six months there could be a large change in the relationship 
between the U.S. dollar and the Swiss franc. While his hedge might not eliminate 
every bit of the risk, it will certainly get rid of a very large portion of it. 
SPECULATING 
While the hedgers provide the economic function of futures, speculators provide the 
liquidity. The attraction for speculators is leverage. One is able to trade futures with 
very little margin. Thus, large percentages of profits and losses are possible. 
Example: A futures contract on cotton is for 50,000 pounds of cotton. Assume the 
March cotton future is trading at 60 (that is, 60 cents per pound). Thus, one is con­
trolling $30,000 worth of cotton by owning this contract ($0.60 per pound x 50,000 
pounds). However, assume the exchange minimum margin is $1,500. That is, one has 
to initially have only $1,500 to trade this contract. This means that one can trade cot­
ton on 5% margin ($1,500/$30,000 = 5%). 
What is the profit or risk potential here? A one-cent move in cotton, from 60 to 
61, would generate a profit of $500. One can always determine what a one-cent move 
is worth as long as he knows the contract size. For cotton, the size is 50,000 pounds, 
so a one-cent move is 0.01 x 50,000 = $500. 
Consequently, if cotton were to fall three cents, from 60 to 57, this speculator 
would lose 3 x $500, or $1,500 - his entire initial investment. Alternatively, a 3-cent 
move to the upside would generate a profit of $1,500, a 100% profit. 
This example clearly demonstrates the large risks and rewards facing a specula­
tor in futures contracts. Certain brokerage firms may require the speculator to place 
more initial margin than the exchange minimum. Usually, the most active customers 
who have a sufficient net worth are allowed to trade at the exchange minimum mar­
gins; other customers may have to put up two or three times as much initial margin 
in order to trade. This still allows for a lot of leverage, but not as much as the specu­
lator has who is trading with exchange minimum margins. Initial margin require­
ments can be in the form of cash or Treasury bills. Obviously, if one uses Treasury 
bills to satisfy his initial margin requirements, he can be earning interest on that 
money while it serves as collateral for his initial margin requirements. If he uses cash 
for the initial requirement, he will not earn interest. (Note: Some large customers do 
earn credit on the cash used for margin requirements in their futures accounts, but 
most customers do not.) 
A speculator will also be required to keep his account current daily through the 
use of maintenance mar~is account is marked to market daily, so unrealized