Leverage allows you to control a larger position with less capital. Margin is the collateral you put up to open that position. Understanding both is crucial for funding rate arbitrage.
What is Leverage?
Leverage multiplies your buying power. With 5x leverage, $1,000 controls a $5,000 position.
📊 Leverage Example
Capital: $1,000
Leverage: 5x
Position size: $1,000 × 5 = $5,000
You control $5,000 worth of the asset with only $1,000 margin.
What is Margin?
Margin is the collateral required to open and maintain a leveraged position. There are two types:
Initial Margin
The amount required to open a position. For 5x leverage, initial margin is typically 20% of position size.
Maintenance Margin
The minimum margin required to keep the position open. If your margin falls below this, you get liquidated.
Isolated vs Cross Margin
| Feature | Isolated Margin | Cross Margin |
|---|---|---|
| Risk scope | Limited to position | Entire account balance |
| Liquidation | Only that position | Can affect all positions |
| Flexibility | Fixed margin per position | Shared margin pool |
| Best for | Risk isolation | Avoiding liquidation |
💡 For Funding Rate Arbitrage
Isolated margin is generally recommended. If one leg gets liquidated, it doesn't affect your other positions or account balance.
Optimal Leverage for Arbitrage
For funding rate arbitrage, lower leverage is safer:
- 2-3x leverage: Very safe, wide liquidation buffer
- 4-5x leverage: Balanced risk/capital efficiency
- 10x+ leverage: High risk, tight liquidation prices
📊 Liquidation Distance by Leverage
2x leverage: ~50% price move to liquidation
5x leverage: ~20% price move to liquidation
10x leverage: ~10% price move to liquidation
Lower leverage = more room for price volatility.
Capital Efficiency
Higher leverage means more capital efficiency but more risk. For arbitrage:
- You need margin on both exchanges
- Total capital = Margin A + Margin B
- APR is calculated on total capital deployed
Key Takeaways
- Leverage amplifies both gains and losses
- Margin is your collateral for leveraged positions
- Use isolated margin to limit risk per position
- 2-5x leverage is optimal for funding rate arbitrage
- Lower leverage = wider liquidation buffer = safer