Can someone help shed some general light on this real life scenario? I’m trying to understand in general terms how Net & Gross Notional Value Limits tie into the risk management of a bond portfolio.
For a bond portfolio that isn’t allowed to use derivatives, unless they are backed by cash equivalents. What does it mean to have an absolute 50% net notional limit and a 200% gross notional limit in terms of market value of the portfolio?
Am I correct to say the net notional value doesn’t reflect potential counterparty risk? While Gross notional value will reflect the maximum loss if everything collapses?
What are you preventing by having these type of limits? Is it just limiting the maximum loss of the portfolio to just the value of it? is the net notional limit better than the gross notional limit? or do you need both in order to prevent someone from leveraging the portfolio beyond the current market value?
thanks,