The movement of large sums of money for relatively small stakes. – When a contract is entered into to deliver or accept a certain commodity under a futures contract, a relatively small payment (margin) can be used to guarantee the future obligation. If the price trend is favorable, a high profit can be achieved due to the leverage effect of the margin. If, however, the price is unfavorable, the loss in relation to the margin may be very large. – In terms of hedge funds, the ratio of equity to loan capital. – A lot of borrowed capital allows a hedge fund to increase the fund return as long as the interest on the borrowed capital is below the return on the investments made. However, if the opposite occurs, the losses deplete the fund’s assets – possibly very quickly. In this case, the hedge fund will be forced to sell securities quickly at first. This can trigger a subsequent selling pressure and reinforce an already existing bear market. – No matter how it is mathematically obfuscated or linguistically obfuscated (“increasing the efficiency of instruments”), leverage ultimately means that a unit of money is spent more than once. – See bear market, deleveraging, derivatives, domino effect, margin, deleveraging, yield efficiency, European Financial Stabilization Facility, foot-dragging, hedge fund dangers, bull market feeds the bull market, highly leveraged institutions, leverage, perpetual motion, spread bets, interest burden ratio.
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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