Module 4   Futures Trading (Video Series)Chapter 4

Leverage and Payoff

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4.1 – Leverage in perspective

Leverage is something we use at some point or the other in our lives. We don’t think about it in the way it is supposed to be thought about. We miss seeing through the numbers and therefore never really appreciate the essence of leverage.

Here is a classic example of leverage in the video – many of you may relate to this one.

In the next video, we will learn how to take a futures trade.

We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.


Key takeaways from this chapter 

  1. Leverage plays a key role in futures trading.
  2. Margins allow us to deposit a small amount of money and take exposure to a large value transaction.
  3. Margins charged is usually a % of the contract value.
  4. Spot market transactions are not leveraged; we can transact to the extent of our capital.
  5. Under leverage, a small change in the underlying results in a massive impact on the P&L.
  6. The profits made by the buyer is equivalent to the loss made by the seller and vice versa.
  7. The higher the leverage, the higher is the risk and, therefore, the higher the chance of making money.
  8. Futures Instrument simply allows one to transfer money from one pocket to another. Hence it is called a “Zero Sum Game.”
  9. The payoff structure of a futures instrument is linear.

 

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