How Does the Leverage Ratio Relate to the Initial Margin Requirement?
The leverage ratio is inversely proportional to the initial margin requirement. For example, a 10x leverage means the initial margin is 1/10th or 10% of the contract's notional value.
A higher leverage ratio requires a smaller initial margin, allowing the trader to control a larger position with less capital. This amplifies both potential profits and losses.
Glossar
Initial Margin
Collateral ⎊ Initial margin represents the equity a trader must deposit with a broker or exchange as a good faith commitment to cover potential losses arising from derivative positions, notably within cryptocurrency markets.
Leverage Ratio
Ratio ⎊ The leverage ratio, within cryptocurrency derivatives and options trading, quantifies the extent of financial risk undertaken relative to available capital.
Notional Value
Scale ⎊ quantifies the total value of the underlying assets represented by outstanding derivative contracts, irrespective of the actual capital exchanged.