How Do Financial Derivatives like Futures Contracts Utilize Leverage?
Futures contracts utilize leverage because a trader only needs to put up a small fraction of the contract's total value, known as margin, to control a much larger position. This means a small change in the underlying asset's price can lead to a large percentage gain or loss on the initial margin deposit.
Leverage amplifies both potential profits and potential losses significantly.
Glossar
Potential Profits
Profit ⎊ Potential profits represent the maximum theoretical gain achievable from a derivatives position, calculated based on the contract's structure and market conditions.
Futures Contracts
Mechanism ⎊ Futures contracts, within cryptocurrency and broader financial derivatives, represent standardized agreements obligating parties to transact an asset at a predetermined price on a specified future date; these instruments facilitate price discovery and risk transfer, extending beyond traditional commodities to encompass digital assets and complex financial indices.
Percentage Gain
Appraisal ⎊ Percentage gain, within cryptocurrency, options, and derivatives, represents the relative increase in value expressed as a proportion of the initial investment or price.
Potential Losses
Exposure ⎊ Potential Losses in cryptocurrency, options trading, and financial derivatives fundamentally represent the quantifiable risk of adverse price movements impacting capital.
Financial Derivatives
Stewardship ⎊ Involves engineering these contracts to explicitly manage or incentivize positive externalities, such as climate risk exposure or carbon credit valuation.
Settlement Process
Clearing ⎊ This phase involves the final confirmation and reconciliation of all trade details between the buyer and seller, often managed by a central counterparty or a decentralized protocol.