Sunday, February 13, 2011

Guide to Forex

Just found this excellent presentation about investing in the Forex market. 



Accounting leverage is total assets divided by total assets minus total liabilities.
Notional leverage is total notional amount of assets plus total notional amount of liabilities divided by equity. Economic leverage is volatility of equity divided by volatility of an unlevered investment in the same assets. To understand the differences, consider the following positions, all funded with $100 of cash equity.
  • Buy $100 of crude oil. Assets are $100 ($100 of oil), there are no liabilities. Accounting leverage is 1 to 1. Notional amount is $100 ($100 of oil), there are no liabilities and there is $100 of equity. Notional leverage is 1 to 1. The volatility of the equity is equal to the volatility of oil, since oil is the only asset and you own the same amount as your equity, so economic leverage is 1 to 1.
  • Borrow $100 and buy $200 of crude oil. Assets are $200, liabilities are $100 so accounting leverage is 2 to 1. Notional amount is $200, equity is $100 so notional leverage is 2 to 1. The volatility of the position is twice the volatility of an unlevered position in the same assets, so economic leverage is 2 to 1.
The most obvious risk of leverage is that it multiplies losses. A corporation that borrows too much money might face bankruptcy during a business downturn, while a less-levered corporation might survive. An investor who buys a stock on 50% margin will lose 40% of his money if the stock declines 20%.

23 comments:

  1. Thanks man on another informative post

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  2. Hmm interesting. I think I might look farther into this.

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  3. sweet info very solid.... definately cheking it further

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  4. Thanks for the video. You've gotten me really interested in this stuff.

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  5. always wanted to buy stock..may be one day i will

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  6. sounds interesting, but i don't have money...

    anyways, cool blog, i'll be sure to check back often. here's mine if you're interested,
    http://lifeofbaron.blogspot.com

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  7. Interesting, Im gonna start learning this stuff

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  8. Thanks for this, I'm saving up money to invest. So this could help me soon.

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  9. good shit man keep up the good work

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  10. So you're saying if we invest at lower amount it is better versus investing with a bunch of money ? Patience and security versus Buying a shitton outright and losing profit ? Maybe I read it wrong.

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  11. oh wow, sound so easy l could try i t out

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  12. Great stuff here!! Im always interested in learning more about forex. Thank you for providing this post

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  13. oh leverage. the downfall of the banks

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  14. Phew, I'm glad I'm not in currency trading haa.

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  15. This is again very interesting, thanks for making the effort :)

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  16. Very useful video, thanks for sharing your find!

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  17. One of the most useful blogs out there. Following!

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  18. Oil can only rise so its probably worth buying a few barrels :)

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