Does a Higher Leverage Increase or Decrease the Distance to the Bankruptcy Price?
A higher leverage significantly decreases the distance to the bankruptcy price. Higher leverage means a smaller initial margin is used for a larger position.
Consequently, a much smaller adverse price movement is required to completely wipe out the margin, bringing the position to its bankruptcy point faster. Lower leverage provides a much wider buffer.
Glossar
Bankruptcy
Default ⎊ This state signifies a critical failure where a counterparty's obligations exceed their available collateral, often triggered in options or futures trading when losses cannot be covered.
Higher Leverage
Exposure ⎊ Higher leverage fundamentally increases a trader's market exposure by allowing control of a larger notional position with a smaller amount of capital.