Limit weighting is the percentage of a deal that you consider at risk. Limit weighting is used to calculate the limit utilization for a deal type. The weighted limit utilization for each deal is calculated by multiplying the deal amount by the limit weighting for the deal type, and then dividing that value by the current exchange rate between the deal currency and your reporting currency.
Set your limit amounts on the actual amount you are prepared to risk, since limits are weighted.
This table shows what the limit utilization of a short term money (STM) deal would be if:
The limit weighting is 100% at all times.
The deal currency is the same as your reporting currency.
| Deal Type | Face Value | Limit Weighting | Exchange Rate | Limit Utilization |
|---|---|---|---|---|
| Short Term Money | 100,000 | 100% | 1.000 | 100,000 |
This table shows what the limit utilizations of a negotiable instrument would be if:
The limit weighting is 100% at all times.
The deal currency is EUR and your reporting currency is USD, with the given exchange rates at times T1 and T2.
| Time | Deal Type | Face Value | Limit Weighting | Exchange Rate | Limit Utilization |
|---|---|---|---|---|---|
| T1 | Negotiable Instrument | EUR 100,000 | 100% | 1 USD = 1.1 EUR | USD 90,909.09 |
| T2 | Negotiable Instrument | EUR 100,000 | 100% | 1 USD = 1.2 EUR | USD 83,333.33 |
This table shows what the limit utilization of a foreign exchange deal would be if:
The limit weighting is 15% when the deal is six months or more from maturity.
The limit weighting is 10% when the deal is less than six months but more than three months from maturity.
The limit weighting is 5% when the deal is less than three months but has not reached the maturity date.
The deal currency is GBP and your reporting currency is USD, with the given exchange rates at times T1, T2, and T3.
| Time | Deal Type | Months from Maturity | Face Value | Limit Weighting | Exchange Rate | Limit Utilization |
|---|---|---|---|---|---|---|
| T1 | Foreign Exchange | 6 or more | GBP 100,000 | 15% | 1 USD = 0.8 GBP | 18,750 |
| T2 | Foreign Exchange | 3 to 6 | GBP 100,000 | 10% | 1 USD = 0.7 GBP | 14,285.72 |
| T3 | Foreign Exchange | 0 to 3 | GBP 100,000 | 5% | 1 USD = 1.2 GBP | 5,555.56 |
Limits weighting works differently for interest rate swaps than for any other deal type. For these deals, limits apply to both the borrowing and the investment portion of the swap. For example, if you make a $900,000 fixed/float deal, then the limit is applied against the borrowing side at $900,000 and the investment side at $900,000. Hence, the total limit utilization for this deal, with 100% weighting, is $1,800,000. Therefore, when you define the weightings for interest rate swap deals, determine the total weighting that you want for those deals and then reduce the value by one-half to achieve the proper limit.
Use the Weightings window to define limit weightings for your deal type and deal subtype combinations. Limit weightings specify the percentage of the face value of a deal type and deal subtype combination that you consider at risk.
You can define multiple weightings for a deal type and deal subtype combination to specify different risks, as the terms of a deal move towards maturity. For example, you can define the risk factor of a foreign exchange contract to be 15% for deals six months or more from maturity; 10% for deals less than six and greater than three months from maturity; and 5% for deals less than three months from maturity. The table below illustrates how you would define this:
| Deal Type | Months | Weighting |
|---|---|---|
| FX | 6 | 15 |
| FX | 3 | 10 |
| FX | 0 | 5 |
Navigate to the Limits window.
Choose the Weightings button. The Weightings window appears.
Enter the combination of Deal Type and Deal Subtype that you want.
Enter the number of Months from maturity you want the weighting to control, if you want to base the weighting on the remaining term of deals. Otherwise, leave the default value of 0.
Enter the Weighting, as a percentage of the face value of the deal type and deal subtype combination you consider at risk.
If you are defining multiple weightings for this deal type/deal subtype combination, repeat steps 4 and 5.
Save your work.