CFA Level I · CFA Level I Exam · Hedge Funds
A managed futures fund posts margin of 8% of notional value on its futures positions and holds the rest of its capital in Treasury bills. The fund holds total futures notional exposure of $150 million with $30 million of capital. The leverage ratio, measured as notional exposure to capital, and the margin posted are closest to:
Leverage is 5.0x because $150 million of notional exposure divided by $30 million of capital equals five. Margin posted is 8% of $150 million, or $12 million, leaving the remaining capital invested in Treasury bills. The other options confuse capital with margin or the margin rate with leverage.
- Aleverage of 5.0x; margin of $12 millionCorrect
- Bleverage of 5.0x; margin of $30 million
- Cleverage of 8.0x; margin of $12 million
Explanation
Leverage = 150/30 = 5.0x. Margin = 8% × 150 = $12 million, which is less than capital of $30 million, leaving $18 million in T-bills. Using 8x confuses the margin rate with leverage, and $30 million confuses capital with margin.
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