Risk & returns
Leverage uses borrowing or derivatives so gains and losses apply to exposure larger than the capital committed. It magnifies sensitivity and can create forced action.
Make it click
A longer lever turns a small hand movement into a larger movement at the far end. The same mechanical advantage also transmits adverse force back to the holder.
Now put that into markets
Debt, margin and derivatives increase economic exposure. Returns on equity rise or fall faster, while financing and collateral must be maintained.
Gross and net leverage answer different questions. Path, volatility, margin rules and rebalancing make leveraged returns more complex than multiplying a final percentage.
Measure notional and risk exposure, financing cost, liquidation threshold and counterparty terms. Stress gaps rather than assuming continuous exits.
Losses can exceed capital and forced deleveraging can occur at the worst time. Daily-reset products have path-dependent compounding.
Takeaway
