Question

Define position limits and exercise limits. What is the purpose of designating these limits? What risk does an exchange face with these limits?

Answer 1

Position limits are those limits which will define a preset level of ownership that will limit the number of derivative contracts a trader is owning.

position limits are always put in place to restrict the trader or a group of trader to have an undue control on the overall market.

exercise limit is also another limit which has been put into place for exercising the number of contracts a trader can exercise in a certain segment to unduly control the price.

exercise limit along with position limits are used to control the manipulation and these are also used in controlling the ethical standards and limiting the unethical practices in the overall Market by developing a cartel to influence the prices of derivative contracts and ultimately affecting price of underlying assets.