# Trading Costs, Leverage and Margin Calculate total exposure and identify costs omitted by a price-only result. Use this workbook alongside the course. Write your answers before opening the solutions. Practical work is self-reviewed; scored knowledge checks are in the Academy. ## 1. Cost components ### Bid-ask spread The bid is a quoted buying price and the ask a quoted selling price from the market or provider's perspective. Crossing from buying at ask to selling at bid creates an immediate cost if the quote is otherwise unchanged. Available size and execution terms still matter. ### Commissions and exchange fees Commissions and exchange-related charges may apply at entry and exit. Record whether a charge is per unit, per order or percentage-based. Minimum fees can make a small order's proportional cost much larger than a large order's proportional cost. ### Financing and swaps Financing reflects the funding arrangement of the instrument and account. A charge can depend on direction, date and notional amount. Do not assume that every gold product has an identical overnight cost or that an advertised rate stays constant. ### Currency conversion charges Conversion charges arise when amounts move between currencies. Separate the exchange-rate effect from an explicit conversion fee, and retain the conversion rate used. Otherwise a price-only journal may not reconcile with account-currency results. ### Worked example A hypothetical buy fills at 100.20 and the immediate sell fills at 100.00, with multiplier ten. The price loss is 2 per contract. If commission is 1 per side, net loss is 4; do not subtract the 2 spread cost a second time. ### Independent exercise Calculate the same round trip for three contracts, assuming all charges scale linearly and there is no financing or conversion charge. My inputs and assumptions: My calculation or decision: Evidence that would change my conclusion: ## 2. Leverage and margin ### Notional exposure Notional exposure is the amount of underlying price exposure represented by a position. With price 100, multiplier ten and three contracts, notional is 3,000. A margin deposit of 300 would not reduce the price sensitivity of that position to 300. ### Initial and maintenance margin concepts Initial margin is collateral required under stated opening conditions; maintenance rules describe conditions for retaining the position. Requirements can change. Learn the actual provider definitions, because similarly named fields may be calculated differently. ### Available funds and liquidation risk Available funds and equity affect whether obligations can be met as prices move. Forced liquidation can occur at unfavorable prices and need not preserve the original planned loss. A cash buffer is a planning decision, not a guarantee against all gaps or rule changes. ### Why collateral is not maximum loss Margin is not a maximum-loss estimate. Loss depends on price movement, quantity, multiplier, contractual protections and execution. An instrument can consume relatively little initial cash while producing a large adverse mark-to-market movement. ### Worked example A position with 3,000 notional exposure loses 5% of that notional under a simplified linear price shock: 150 before costs. Relative to collateral of 300, that loss is 50%. Leverage changes the cash sensitivity relative to posted funds. ### Independent exercise For the same position, calculate a 2% adverse notional move and compare the loss with collateral of 300. State one reason actual results could differ. My inputs and assumptions: My calculation or decision: Evidence that would change my conclusion: ## 3. Holding-period costs ### Overnight financing An overnight charge depends on the actual account's funding terms and the dates the position is held. Record the charge as a cost of that trade or allocate it consistently when several positions share an account-level adjustment. ### Weekend treatment under provider terms Weekend and holiday treatment may involve specific charging dates or multiples under provider terms. Do not infer the charge from the number of calendar nights alone. Verify the schedule and preserve the applicable term version. ### Futures rollover costs Rolling futures generally involves closing or reducing one expiry and opening another. Costs can include bid-ask spreads, commissions and changes in the contract price relationship. A back-adjusted chart can conceal a roll gap without removing the economics. ### ETF expenses and tracking differences Fund expenses reduce the fund's value over time under its structure. Tracking difference also reflects other factors, so it is not always equal to the advertised expense figure. Compare the same reference, currency and period when evaluating a fund. ### Worked example A trade makes 40 from its actual entry and exit prices, pays 6 commissions and 9 allocated financing. Net result is 25. Reporting 34 would omit the holding-period charge and overstate the trade's contribution. ### Independent exercise Reconcile gross price P&L of −20, commissions of 4 and financing of 3. Explain whether the financing becomes irrelevant because the trade lost money. My inputs and assumptions: My calculation or decision: Evidence that would change my conclusion: ## 4. Cost-aware decisions ### Break-even movement Break-even movement must cover relevant costs. For a hypothetical multiplier of ten and fixed round-trip costs of 5 per contract, a favorable 0.50 price move only covers those costs before any additional slippage or financing. ### Cost relative to stop distance Compare total cost with the planned stop distance and expected gross movement. A strategy targeting very small moves can be particularly sensitive to costs. A low advertised spread alone does not establish that the strategy is executable. ### Effect of turnover Turnover multiplies repeated costs. If an account takes many trades, small per-trade fees can become a substantial drag. Evaluate net expectancy using the same assumptions across all trades instead of presenting a gross edge and adding costs as an afterthought. ### When costs invalidate a small apparent edge An apparent positive result can disappear under realistic costs. Rejection is a useful research outcome: it prevents an economically weak idea from being promoted because its chart entries looked attractive. Test uncertainty in costs rather than choosing the cheapest observed period. ### Worked example A hypothetical strategy averages 4 gross per trade over 100 trades. If costs average 5, net expectancy is −1 and aggregate net P&L is −100 before any unmodeled charges. A positive gross average is not sufficient. ### Independent exercise Calculate net expectancy when gross average is 7 and costs are 3, then repeat when stressed costs are 8. Explain what the comparison contributes to a decision. My inputs and assumptions: My calculation or decision: Evidence that would change my conclusion: ## Course project Compare two hypothetical trade statements and explain their different net outcomes. ### Self-review rubric - Concepts and reasoning: 25% - Calculations, data and evidence: 30% - Process and risk controls: 25% - Limitations and communication: 20% Record one correction and one next practice task. This rubric is not automatically graded. ## Worked solutions ### Exercise 1 The fill-price loss is 6 and the two-sided commission is 6, giving a net loss of 12. The assumptions exclude minimum fees and nonlinear execution effects; those must be added if applicable. ### Exercise 2 The simplified loss is 60, or 20% of 300. Execution costs, conversion, nonlinear exposure or a different actual price path could change the outcome. The exercise does not predict a liquidation threshold. ### Exercise 3 Net result is −27. Costs matter for both winners and losers. Removing charges from losing trades would systematically distort the sample's performance. ### Exercise 4 The two net averages are 4 and −1. The strategy is cost-sensitive; the comparison shows why implementation conditions matter. It does not establish how often either cost regime will occur. ## Further reading - https://www.cmegroup.com/education/courses/introduction-to-futures