A leverage ratio compares market exposure with the margin or equity supporting that exposure. In derivatives, it is commonly expressed as a multiple such as 5× or 10×, but the numerator and denominator must be defined before ratios can be compared.
Selected and effective leverage can differ
A selected leverage setting often determines an initial margin requirement. Effective leverage instead measures exposure relative to the relevant current equity or collateral basis. Extra collateral, unrealized PnL and other positions can make effective account leverage differ from the selected number.
For a simplified position with notional exposure of 5,000 and supporting equity of 500, the ratio is 10×. With the same exposure and equity of 1,000, it is 5×. These examples assume consistent currency valuation and ignore costs and valuation discounts.
The ratio is not a liquidation formula
A higher ratio means a given price movement represents a larger change relative to the supporting capital. For the same position quantity, it does not independently multiply absolute trading profit.
Maintenance margin, collateral valuation, fees and account structure determine when liquidation occurs. Comparing ratios also requires consistent treatment of gross versus net exposure. Opposing positions can reduce directional risk without eliminating every funding, liquidity or collateral risk.