The question asks how the leverage ratio, of a portfolio comprising of long futures, changes with changing market conditions.
According to me, in case of rising markets variation margin requirements reduce. Hence leverage increases... Since you get same exposure for reduced margins.
However the solution states the opposite, ie, leverage ratio falls in rising markets.
Can anyone explain the reason.
Additionally can anyone also explain "cash drag", mentioned in the solution to the above question.
Thanks
Last edited by a moderator: Jan 20, 2020