The ability to use borrowed money is a necessary skill for a successful businessman. The loan allows you to expand your company and start a new business. But to get borrowed money, you need to have a margin in case of force majeure situations. How do you calculate leverage?
Instructions
Step 1
In economic theory, leverage is defined as the ratio of the amount borrowed to the amount available from the borrower. Thus, if a person who has guarantees for 100 thousand dollars comes to the bank and takes a loan for a million, the leverage is 1 in 10.
Step 2
The use of leverage allows you to multiply your profits due to correct forecasts, analysis of market conditions. So, if analysts can predict with high accuracy the change in the exchange rate of one currency in relation to another, the funds they have do not allow them to fully increase the amount of their savings due to a foreign exchange transaction.
Step 3
Leverage is especially commonly used in foreign exchange transactions, Forex markets and trading floors. The intermediary (guarantor of the transaction) enables merchants to use a large amount of borrowed funds - the leverage can reach 1: 1000. This means that a thousand dollars will allow you to use a million in the transaction. In most cases, the guarantor does not risk anything - if the merchant loses (if his forecast does not coincide with reality), the guarantor will simply take the "bet" - the thousand dollars itself or any amount that is the "support" of the leverage.
Step 4
Any inside information that proves the success of the forecast, as well as additional guarantees caused by the reputation of the borrower, can increase the leverage. Thus, any US bank is more likely to give a "higher" leverage to an entrepreneur from Germany than from a developing African country. The fact is that business in Europe has great guarantees from the state, the German economy itself is an additional guarantor of payments. It turns out that the risks affect the leverage - the more security, the greater the leverage itself.
Step 5
Provide a detailed business plan to obtain a financial or bank loan to run your own business. It is advisable to obtain guarantees from entrepreneurs known to you. These guarantees will increase the leverage itself.
