The formula to calculate margin leverage is:
\[ \text{L} = \frac{\text{E}}{\text{E} - \text{M}} \]
Where:
Margin leverage refers to the practice of using borrowed funds from a broker to trade financial assets, which forms the collateral for the loan from the broker. This strategy allows investors to amplify their buying power and potential returns, but also increases the risk of losses. The leverage ratio is determined by the amount of margin (borrowed money) used in the transaction compared to the investor’s own funds.
Let's assume the following values:
Using the formula:
\[ \text{L} = \frac{100000}{100000 - 20000} = \frac{100000}{80000} = 1.25 \]
The leverage ratio is 1.25.
