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How Does the Cost of Financing (Interest Rate) Affect the Profitability of a Leveraged Derivatives Trade?

The interest rate charged by the prime broker on the borrowed capital is an ongoing expense that directly reduces the net profit of the trade. If the trade's return does not exceed the cost of financing, the leveraged position will be unprofitable.

Higher interest rates require a higher return hurdle, making the strategy more challenging to execute profitably.

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