What Is the Relationship between Leverage and the Initial Margin Percentage?
Leverage and the Initial Margin percentage have an inverse and direct mathematical relationship. The Initial Margin percentage is calculated as 1 divided by the leverage ratio.
For example, 50x leverage requires 2% Initial Margin (1/50). The higher the leverage chosen, the smaller the required Initial Margin percentage, meaning less capital is needed to open the position, but the liquidation risk is much higher.
Glossar
Margin Percentage
Leverage ⎊ Margin percentage, within cryptocurrency and derivatives markets, represents the capital required relative to the total trade exposure, directly influencing potential profit magnification and associated risk.
Required Initial Margin
Collateral ⎊ Required Initial Margin represents a quantified amount of capital, stipulated by exchanges or clearinghouses, that a participant must deposit as a performance bond prior to establishing a derivatives position, functioning as a first line of defense against counterparty credit risk.
Maintenance Margin Percentage
Margin ⎊ The maintenance margin percentage, a critical component of risk management within cryptocurrency derivatives, options trading, and broader financial derivatives, represents the percentage of equity required to be maintained in an account to cover potential losses.
Initial Margin Percentage
Allocation ⎊ The Initial Margin Percentage is the minimum proportion of the total notional value that a trader must deposit as collateral to open a new leveraged derivatives position.
Margin Requirement
Collateralization Standard ⎊ Margin Requirement is the minimum amount of collateral, expressed as a percentage of the notional value, that a trader must deposit to open or maintain a leveraged derivatives position, ensuring the exchange has a buffer against adverse price movements.
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.