How Does the Concept of “Effective Leverage” Differ from Stated Leverage?
Stated leverage is the maximum leverage an exchange allows. Effective leverage is the actual leverage being used, calculated as the notional value of the position divided by the actual margin (equity) in the account.
Effective leverage changes constantly with price fluctuations and P&L, whereas stated leverage is a fixed limit. Traders should focus on effective leverage for true risk assessment.
Glossar
Maximum Leverage
Amplification ⎊ Maximum leverage, within cryptocurrency and derivatives markets, represents the utilization of borrowed capital to increase the potential return of an investment, fundamentally altering risk-exposure profiles.
High Leverage
Amplification ⎊ High leverage, within cryptocurrency and derivatives markets, fundamentally alters risk-reward profiles by enabling a smaller capital outlay to control a larger notional exposure.
Leverage and Margin
Interrelation ⎊ Leverage and Margin are inextricably linked concepts in derivatives trading, where margin represents the collateral posted to secure a position, and leverage defines the degree to which that margin magnifies the trade's notional size.
Stated Leverage
Definition ⎊ Stated Leverage is the maximum leverage ratio advertised or offered by a derivatives exchange, representing the theoretical multiplier of a trader's capital that can be used to control a notional position size.
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.
Leverage
Amplification ⎊ Leverage, within cryptocurrency, options, and derivatives, represents the utilization of borrowed capital to increase the potential return of an investment, fundamentally altering risk-reward profiles.