Capital $10,000
Buying Unit Pirce : $1.00
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 ....
