Can someone please explain why “Max Leverage Ratio = 1/ Minimum Margin”? I would like to know the logic behind this
Just remember that leverage ratio is Assets/Equity. This gets larger as equity gets smaller.
Minimum margin represents the lowest amount of equity you are allowed to contribute (the rest being debt).
1/minimum margin therefore is simply the leverage ratio formula using the lowest amount of equity possible (and thus the highest possible leverage ratio).