Gross and net exposure limits measure different risks

A gross exposure limit bounds the sum of absolute position notionals. A net exposure limit bounds their signed sum under a declared grouping rule. We would compile both when the owner intends to limit total deployed risk and directional imbalance. A portfolio can satisfy one while violating the other.

In an illustrative account with equity of $20,000, an $18,000 long and a $12,000 short give gross exposure of $30,000 and net exposure of $6,000. Relative to equity, those are 150% gross and 30% net. A proposed 140% gross ceiling rejects this state, even though a 40% absolute-net ceiling accepts it. The short offsets direction in the arithmetic; it still contributes to gross position exposure.

Two numbers need one valuation contract

The fixture uses position notional, rather than posted margin or initial trade cash. Both legs use the same valuation timestamp and settlement currency. The compiler must state whether equity includes unrealized profit and which conversion prices apply. Otherwise a ratio can change merely because the numerator and denominator were sampled differently.

We would store gross and signed net separately, then evaluate the absolute-net restriction explicitly. A proposed $2,000 reduction of the long moves gross to $28,000 and net to $4,000. At unchanged equity, the resulting 140% gross and 20% net satisfy both illustrative ceilings. A $2,000 increase of the short also reduces net to $4,000, but raises gross to $32,000. That contrast is the central acceptance case.

For review, preserve both before and after portfolios. Include a zero-equity case that returns an undefined ratio and a blocked exposure increase. Include prices expressed in two currencies and require conversion before summation. Exposure arithmetic establishes compliance with the chosen measure; it leaves basis risk and correlation for separate analysis.

For a first local review, we would preserve the original owner wording beside the typed fields and ask a second reviewer to derive the expected result independently. Any disagreement identifies an ambiguity to resolve before execution. The saved fixture should contain both accepted and rejected cases so a procedure that rejects everything cannot receive credit for useful compliance.

Our mandate compiler provides the wider instruction-to-action framework for this exposure metric. The published controls research supplies its historical background. DXAP publicly describes the corresponding separation between model proposals and external policy checks.