As a matter of policy each bank establishes “limits” for various levels.in case a bank has more centers dealing in foreign exchange, the limit is allocated to each center. Such limits are periodically reviewed and revised.in the event of a special situation arising interim limits are approved for a given transaction or a limited period. excess over limits needs to be immediately reported to the approving authority.

In many countries the central banks or other regulatory authorities impose their own limits on maximum exposure in which case such limits override institutional limits; the rule should be the central bank’s limit or head office limit whichever is less.

Overnight Limit

Overnight limit changes in spot rate and forward rates have immediate impact on the value of net exchange position. Due to time zones and overnight when banks in one country are closed, the political and economic changes in another country may create a vulnerable. therefore a limit “open position” is placed for each currency.

This limits the maximum allowable assets exchange bought contracts over liabilities and exchange sold contracts and vice versa, which may be left uncovered on any overnight basis. Limits should be established for individual currencies as well as for a group of currencies. A limit should also be established for net off all currencies against the local currency.

Daylight Limit

As during the daytime a dealer may have the ability to initiate transactions to cover his position and thereby limit the loss situation, usually daylight limits are more than overnight limits.

Both the overnight and daylight limits seek to control the rate risk on foreign exchange exposure.

Override Limit

In addition to daylight limit ang overnight limit, banks usually establish “override limit” i.e. a limit for aggregate net position in all the currencies traded.

Aggregate Turnover Limit

This sets a limit on the total outstanding spot and future exchange contracts.it serves as an overall check on the volume of trading activity.

Customer Limits

Credit lines must be established for all counter parties. Credit lines are established to address the following risks:

    A.   Rate volatility risk
This limits rate risk exposure that occurs by sourcing funds from the market if the counter party fails to fulfill its side of the contract. the actual gain or loss for the transaction depends on the rates prevailing in the market, relative to the rate contracted with the counter party.

    B. Delivery Risk
This limits the payment risk at the time of liquidating a contract, owing to timing differences among various financial centers. Given the impracticability of verifying the receipt of currency from the counter party prior to making payment, a payment risk arises which is controlled by a delivery risk limit. the delivery risk involves 100% of the funds involved in the transaction.

Funding Limit

This controls the mismatch of maturities of the assets, liabilities and exchange contracts and sets a cap on the extent to which the cumulative outflow resulting from the payment of liabilities or the sale of a currency may exceed over time the inflow from assets or purchase contracts.

Capital Budgeting TechniquesAs a matter of policy each bank establishes 'limits' for various levels.in case a bank has more centers dealing in foreign exchange, the limit is allocated to each center. Such limits are periodically reviewed and revised.in the event of a special situation arising interim limits are approved for a...Capital Budgeting Techniques and Investment analysis