Floor Value Determination

Floor value determination is the process of setting the minimum acceptable value for a portfolio under a CPPI strategy. This floor acts as the safety net, dictating when the strategy must shift entirely into risk-free assets to prevent further loss.

In crypto, this often involves calculating the cost of future liabilities or a specific percentage of initial capital. Setting the floor too high restricts growth, while setting it too low increases the risk of significant capital erosion.

It is often determined by the investor risk appetite and the time horizon of the investment. Once the floor is breached, the CPPI strategy effectively terminates its risky exposure.

Accurate determination requires considering the impact of transaction costs and potential slippage during the liquidation of risky assets. It serves as the ultimate boundary for the risk management framework.