[DcifrThs]

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Barron,

I think it must be the case that you get slightly less than 2x the increases, but slightly more than 2x the decreases. Over time, you'll lose. Is this because of the interest paid to leverage?

Max

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think of it this way: without any haircut or repo rate for the collateralized loan, you'd get 100% of the gains on 2*S&P500 and 100% of the losses on S&P500.

now, with a repo, you get 100% of the gains on 1.98*S&P500 and 100% of the losses on 1.98*S&P500

for that, you pay a repo rate of something near the risk free rate (typically, for some reason historically, slightly under it) AND, since you have counterparty risk, you don't get 100% of the face value of your collateral. this is a haircut.

so you pay a flat fee (repo rate) and, for that fee, get 100% of all the gains and losses on almost 2*your underlying.

anyways, everybody, i was just using this as an EXAMPLE. if i really wanted leverage on an S&P500 position, i'd go to the futures market as it is cheaper and doesn't give a haircut.

the point of the example was to show that if you get X* daily losses and X*daily gains, then you MUST get X* yearly losses and X* yearly gains. i don't see how that is not the case.

Barron