Basically, what is the difference between Leverage and Arbitrage?
Thanks! A: Leverage is using a base capital to borrow on margin. So in fact, one futures contract of the Nasdaq100 (NQ), allows one to borrow 20x the actual price of the index so if the Nasdaq’s quoted at $2500, you’re actually managing a position of $50K with a single leveraged position. Then, small moves equal either a big payoff or loss. Now, arbitrage is using the differences between one market’s valuation vs another. So if the Japanese Yen is offering 0.5% interest rate and the Australian Dollar, 4%, then one could theoretically borrow Yen at 0.5%, using leverage to borrow some more with the right hedge fund/capital connections, and then buy Australian dollars with 4% and pocket the difference of 3.5% with a certain prediction that the floating price of the AUD/JPY index stays within a certain volatility and price range for that business quarter (or some other quantity of time) while the trade is happening. Of course, there’s a risk of a breakaway which could render the trade a bu
