Buy Crypto
Markets
Contract
Spot
Earn
Web3 new
Learn
Help Center > FAQs > How does leverage affect my ROE for a position? >

How does leverage affect my ROE for a position?

Date: 2024-04-30 05:47:30

ROE (Return on Equity) is determined by the unrealized profit and loss (PnL) of a position divided by the initial margin of the position.

When adjusting leverage for a position, the initial margin requirements change while the position size (quantity) remains constant.

Increasing leverage decreases the initial margin required, while decreasing leverage increases the initial margin required. Consequently, if the unrealized PnL remains constant, an increase in the initial margin reduces ROE, whereas a decrease in the initial margin increases ROE, despite the unchanged unrealized PnL. 

Let’s see the example below,

Position size: 1 ETH on ETH/USDT USDT-M

Direction: Long

Leverage use: 5x

Average entry price: 3000

Current last traded Price: 3500

initial margin: 3000 / 5=600

Unrealized P&L of position (excluding fees):  1x1x3500-1x1x3000=500

ROE: 500/600=83.3%


Now assuming the leverage use is increased to 10x

New initial margin:  3000/10=300

ROE: 500/300=166.7%


In the above example, despite implementing higher leverage, the only variable that changed was the position margin (denominator), resulting in an increased ROE (from 83.3% to 166.7%). Nonetheless, the unrealized PnL remained consistent; if the trader decides to close the position, the profit and loss will be the same, regardless of whether they employ 10x or 20x leverage.



Was it helpful?
Yes Yes
No No
Still Need More Help? Click here to chat with us