What is the futures leverage ratio formula?

The futures leverage ratio formula is correctly represented by the formula (notional - margin)/margin. This ratio reveals the extent of leverage employed in futures trading.

To break it down:

• The notional value refers to the total value of the position being controlled through the futures contract. This value represents the size of the investment or the amount on which the contract is based.
• The margin is the amount of money that the trader must deposit to open and maintain the position. This is essentially a performance bond ensuring that both parties fulfill their contractual obligations.

The formula shows how much of the notional value is potentially funded by the margin. Essentially, it calculates the amount of leverage being used, reflecting a relationship between the invested amount and the total exposure.

If the margin is relatively small compared to the notional value, the leverage ratio will be high, indicating that even a small price movement can result in significant gains or losses for the trader. Understanding this ratio is crucial for assessing risk and managing leverage in futures trading.