## Friday, August 8, 2008

### Calculation sample for Gold Pawn story : Case 2 & 5

Capital \$10,000

Purchased Units = 10,000 x 1 = 10,000 units

Pawn to get 65% cash = 10,000 x 65% = \$6,500
Use the money to buy again = 6,500 x 1 = 6,500 units

========= CASE 2

When unit price goes up 10% in one month to \$1.10
Sell 6,500 units to take profit = 6,500 x 1.1 = \$7,150
Use the money to pawn back : 7,150 - 6,500 = \$650
Pay the pawn safe keeping fee, assuming the calculation is 6,500 x 0.75% / 12 = \$4.06*note1
Sell the 10,000 units to take profit = 10,000 x 1.1 = \$11,000

Total Earning is 11,000 + 650 - 4.06 = \$11,645.94
Net Profit = 11,645.94 - 10,000 = 1,645.94
Profit Percentage : 1,645.94 / 10,000 = 16.46%

========= CASE 5

When unit price goes down 10% in one month to \$0.90
Sell 6,500 units to take profit = 6,500 x 0.90 = \$5,850
Use the money to pawn back : 5,850 - 6,500 = -\$650
Pay the pawn safe keeping fee, same as above
Sell the 10,000 units to take profit = 10,000 x 0.90 = \$9,000

Total Earning is 9,000 - 650 - 4.06 = \$8,345.94
Net Profit = 8,345.94 - 10,000 = -1,654.06
Profit Percentage : -1,654.06 / 10,000 = -16.54%

16.46% vs 16.54% carries a 0.08% gap.

note1 : A more probable calculation method for the safe keeping fee is as followed :
10,000 x 0.75% = \$75 per month

If we use this fee, then the differences are 15.75% vs -17.25% = 1.5% difference, not just the 0.08% small difference.

But in this Gold Pawn story, the key message is actually educating on the right way to determine if a Leverage technique should be adopted or not. How to compare 2 different leverage strategies etc. So the actual calculation is not that critical. Remember malpf's preaching ? ... you should run your own numbers and not just based on any other people's concept, not even malpf's.

Hope this helps ....