How Does the Collateral’s Value Fluctuation Affect the Effective Leverage in an Inverse Contract?
In an inverse contract, if the base asset's price rises, the value of the collateral (e.g. BTC) increases.
Since the position size is fixed in USD terms, the collateral increase effectively lowers the actual leverage used. Conversely, if the base asset's price falls, the collateral's value decreases, and the effective leverage increases, bringing the liquidation price closer.
Glossar
Value Fluctuation
Volatility ⎊ Value fluctuation within cryptocurrency, options trading, and financial derivatives represents the degree of price dispersion over a defined period, directly impacting risk assessment and option pricing models.
Effective Leverage
Amplification ⎊ The concept of effective leverage, particularly within cryptocurrency derivatives, options trading, and broader financial derivatives, represents the realized degree of market exposure beyond the nominal notional value of a position.