Use of Leverage and Derivatives
Leverage uses borrowed funds to boost position size; it can magnify gains — and losses. Derivatives are contracts whose value is derived from an underlying asset (stocks, bonds, commodities, Rates, etc.).
How Leverage Magnifies Gains & Losses
$8,000
Own capital: $2,000 • Total invested: $10,000
10%
Drag to see how gains/losses scale with leverage.
Total Portfolio Value
$11,000
Net Profit/Loss
$1,000
% Return on Own Capital
50%
Derivatives at a Glance
Uses in Investment
Hedging (Risk Management)
- Protects against price moves in underlying assets.
- Example: Airline buys oil futures to lock fuel costs.
Speculation (Profit Seeking)
- Express a view on price without owning the asset.
- Example: Buy a call option expecting stock to rise.
Risks and Rewards
High Impact
Leverage
Amplifies gains on the upside.
Capital Efficient
Derivatives
Get asset exposure with lower upfront cost.
Volatility ↓
Hedging
Smooths portfolio swings by offsetting risks.