financial leverage question

what is financial leverage? how is it related to futures contracts? explain futures margin and maintenance margin. discuss how futures are used to hedge against price volatility.

-define financial leverage -define futures contracts -how do futures relate to leverage? -discuss maintenance margin -how are futures used to hedge against price volatility?

define futures contracts

a future contract is an agreement involving the future exchange of an asset for cash at a price that is determined (fluctuates) daily

define financial leverage

financial leverage is the use of borrowed funds to buy assets. by using leverage, investors can increase their gains by using borrowed funds if the gain generated from the capital gain is greater than the cost of borrowing

how do futures relate to leverage? what is margin?

futures require a margin, typically around 2% of the contract size. the margin is thus the minimum amount of money needed to deposit before entering into a futures contract. when the contract is liquidated, the investor receives the amount of the margin plus any capital gains from the position. thus, futures are leveraged instruments

discuss maintenance margin

the maintenance margin is the lowest amount that a margin account can reach before needing to be replenished to the original amount. typically it is around 75% of the margin.