Question

Why can the Yield Curve be used to predict future recession? Also, Why are both futures and options are said to be "highly leveraged" investment instruments?

Answer 1

Yield curve can be an indicator for an impending recession as when the short term yield spikes over the long term yield , there is an inverted yield curve as people are very bearish in long term on bonds as they expects that economy would be in a recessionary scenario and hence the long term bond yields nosedive.

Both futures and options are said to be highly leveraged instruments bacause it is a derivative security which is based upon value of some underlying asset and brokers provides with excessive amount of leverage to trade them. In a few cases the leverage can upto 100 times as they are highly speculative in nature and they can be traded using a small capital as margin requirements are also lower. Warren Buffett once said" they were weapons of mass destruction of wealth".