GBPJPY is more volatile than USDCAD, which makes a 5:1 GBPJPY trade riskier than a 5:1 USDCAD: D-Leverage for the GBPJPY trade is 5.5-6, because GBPJPY is 10-20% more volatile than the EURUSD!
Take a position made up of these two trades:
- $ 70,000 upwards in USDCAD (7:1)
- $ 70,000 down on GBPJPY (7:1)
Nominal leverage, as it´s normally computed, would be 14:1.
How about economic risk, in EURUSD multiples? It could be anywhere from 0 (if perfectly negative correlation between USDCAD and GBPJPY prevailed during the position´s duration) and 20:1 if USDCAD and GBPJPY were perfectly positively correlated - at a time of high market volatility!
D-Leverage tracks economic risk. D-Leverage = 9, implies some positive correlation between USDCAD and GBPJPY: risk would be equivalent to a $ 90,000 (9 * 10,000 equity) EURUSD trade.
D-Leverage works for any number of concurrent trades in a position, because it accounts for recent market volatility and correlation!