Why Is Effective Leverage a More Important Metric than Nominal Leverage for ADL Ranking?
Nominal leverage is the leverage chosen by the trader when opening the position. Effective leverage is a dynamic metric that reflects the actual risk, calculated as the notional value divided by the current margin balance (collateral).
It is more important for ADL because it shows the true proximity to liquidation. A trader with low nominal leverage but high unrealized losses may have a higher effective leverage and thus a higher ADL ranking.
Glossar
ADL Ranking
Calibration ⎊ The ADL Ranking, within cryptocurrency derivatives, represents a volatility surface calibration metric, assessing the accuracy of implied volatility models against observed option prices.
Effective Leverage
Amplification ⎊ The concept of effective leverage, particularly within cryptocurrency derivatives, options trading, and broader financial derivatives, represents the realized degree of market exposure beyond the nominal notional value of a position.
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.
Current Margin Balance
Collateral ⎊ Current Margin Balance represents the equity held as security against open positions within cryptocurrency derivatives markets, functioning as a critical risk management component for both traders and exchanges.