Can anyone please help on explaining the difference between the two? That’s only thing I know: Nominal (notional or monetary) limits - specify maximum captial per activity VAR-based position limits - complementary to nominal limits Did Schweser do a bad job on this? Or it’s just me? Thanks!
Nominal limit===>I am only giving you $100M…that it. Var-based Position====>Given the stat of your portfolio, your max VAR can only be 5% @ $10M…let me the do math…that is I am giving you $200M. (Totally made-up numbers) helps??
thanks ws. It;s clear for me on the VARbased part now. I was reading about that: nominal position disadvantage - it permit flexibility through the use of leverage or replicating transaction. (From risk management perspective). Why?
The disadvantage of nominal limit (from risk management standpoint) is that you can use extensive leverage (say 50:1) and that will increase your risk greatly. In other words there is no limit placed on how much risk you can take. With VAR-based limit, the level of risk is capped, you can still use leverage but only to a point until you reach your VAR-based limit.
got it. thanks volkovv