The use of borrowing or derivatives to increase exposure beyond the capital invested. It magnifies both gains and losses.
Where you will meet it
Leverage comes up in 67 learning outcome notes across the FRM syllabus.
A few of them:
Banks FRM Part I · Financial markets and products
“It also added a leverage ratio of at least 3%, defined as Tier 1 over total exposure with no risk weights.”
The Building Blocks of Risk Management FRM Part I · Foundations of risk management
“Shareholders of a leveraged firm can gain at the expense of lenders by shifting to riskier assets.”
Regression Diagnostics FRM Part I · Quantitative analysis
“An outlier is an observation that sits far from the pattern of the rest of the data, either in y (a large residual) or in the regressors (high leverage).”
Measuring and Monitoring Volatility FRM Part I · Valuation and risk models
“Other causes are jumps from news and announcements, shifts between market regimes, and leverage and forced selling in stress.”
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