What Is the Relationship between Leverage and Bankruptcy Price Proximity?
Higher leverage results in the bankruptcy price being closer to the entry price. Since higher leverage means a smaller initial margin is used, a smaller adverse price movement is required to wipe out the entire margin.
Conversely, lower leverage places the bankruptcy price further away, providing a larger buffer.
Glossar
Bankruptcy Price
Threshold ⎊ This theoretical price point represents the level at which a specific derivative position, often collateralized, becomes sufficiently under-margined to trigger immediate liquidation or default procedures under the governing contract terms.
Bankruptcy
Default ⎊ This state signifies a critical failure where a counterparty's obligations exceed their available collateral, often triggered in options or futures trading when losses cannot be covered.
Adverse Price Movement
Exposure ⎊ Adverse price movement within cryptocurrency derivatives represents a deviation from anticipated directional forecasts, impacting portfolio valuations and risk parameters.
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.