Page 10 - FINAL CFA SLIDES DECEMBER 2018 DAY 13

Session Unit 13:
44. Market Structure & organisation

Leveraged position Using borrowed funds to buy an asset:
• If investor buys with funds borrowed from broker, borrowed funds is called margin loan, interest rate is called
call money rate, and brokers are said to buy on the margin.
• Initial margin requirement is the minimum equity (set by the government, exchange, clearinghouse, or broker)
that investors must provide to secure margin loan.
• The use of leverage magnifies both the gains and losses from changes in the value of the underlying asset. The
additional risk from the use of borrowed funds is referred to as risk from financial leverage.

LOS 44.f: Calculate and interpret the leverage ratio, the rate of return o
tantiesn a margin transaction, and the security
price at which the investor would receive a margin call, p.200

The leverage ratio of a margin investment is the value of the asset divided by the value of the equity
position. For example, an investor who satisfies an initial margin requirement of 50% equity has a 2-

to-1 leverage ratio so that a 10% increase (decrease) in the price of the asset results in a 20% increase
(decrease) in the investor’s equity amount.