Daylight: as the name suggests – these are the trades that are undertaken in the normal course of the day and will expire if not executed on the same day (end of trading time). A bank may place a buy and a sell order simultaneously, so they buy low and sell higher. In this case, either no trade will be executed or one or both – depending on the levels touched during the day.
Overnight: as the name suggests, these trades are entered and are live trade until executed till the next day. All overnight trades carry 100% weightage to risk. These exposures have to be monitored on a real time basis.
4.2 Intra-day limit:
this is a very critical limit – as it allows the client to take an exposure to that extent but does not allow to carry forward. In other words, a limit that can be reached only within the day.
4.3 Dealer Limit:
This is the limit (extent) that is enjoyed by that particular individual trader. He cannot exceed this limit. The moment he reaches this limit, he Login ID freezes and he cannot do any more transactions, unless he wants to square-off the existing positions. No new positions will be allowed. These are tracked on real time automatically by systems. The Mid office usually keep a close eye on these limits.
4.4 Currency limit:
As the name suggests, this is a limit that is imposed by the bank on a particular currency (or a currency pair) – as the bank does not want to go beyond a particular level of exposure in that currency pair. Again, these are auto-monitored by the system under the surveillance of Mid Office.
4.5 Stop Loss Limit:
Stop loss is a limit that acts as a safety valve if something starts to go wrong with a trade or a position. In other words, it is a transaction waiting to execute if the currency or price breaches (or reaches) a particular level – as the bank does not want to take exposures beyond that price point. So losses will be booked and the position will be squared off at those levels. This is usually done, when bank are expecting some news that may affect the prices adversely or of the asset or markets in general are volatile.
4.6 Clearing house:
A clearing house is an Institution engaged in the activities of offsetting transactions with one another in order to limit payment settlements to net balances. If it were not for clearing houses, all counter parties would be making gross settlements for all transactions.
Clearing houses also play a key role in settlement of international payments.
4.7 Netting:
Netting can help to alleviate some of the pressures due to receivables and risks associated with cross currency rate movements and receipt failure. Introducing a netting systemwould also capture and separate the inter-company flow and help to minimize the exposedvolume.
4.8 Arm’s length principle:
The “arm’s-length principle” of transfer pricing states that the amount charged by one related party to another for a given product must be the same as if the parties were not related. An arm’s-length price for a transaction is therefore what the price of that transaction would be on the open market.
Hence the price charged by the bank or an organization to its own subsidiaries is always under scrutiny / audits.
4.9 Gap Management:
Gap Management enables banks to monitor and manage interest rate risks from transactions so they can make strategic decisions with regard to gap positions for defined points in time. Liquidity analysis and the cash flow evaluation enable banks to manage their liquidity requirements and NPV risks.
In contrast to NPV analysis, where risks are recorded using NPVs and future values, in gap management, the position and maturity volumes as well as cash flows and liquidities are displayed on key dates or for periods.
4.10 Nostro:
Nostro accounts are foreign currency accounts maintained with Correspondent banks tofacilitate clearing forex transactions of the bank.