What Is the Concept of ‘Effective Leverage’ in Derivatives Trading?
Effective leverage is the true leverage being used in a derivatives position, calculated as the notional value of the position divided by the total capital (margin) in the account. It often differs from the maximum leverage offered by the exchange.
For instance, if a trader uses 10x leverage but has extra funds in their cross-margin account, the effective leverage is lower. It provides a more accurate measure of the actual risk exposure compared to the nominal leverage setting.
