How Does High Leverage in Cash-Settled Contracts Increase Liquidation Risk?
High leverage increases liquidation risk because it dramatically reduces the margin cushion available to absorb losses from adverse price movements. A small percentage move against the position can cause the account equity to fall below the maintenance margin level, triggering an automatic liquidation.
Since cash-settled contracts are typically highly leveraged, traders are more susceptible to being wiped out by short-term volatility.
