Difference between Overbought and Oversold

Overbought Position

Overbought means that a bank’s assets and purchases of a particular foreign currency exceed its liabilities and sales of that currency.

Oversold Position

Oversold means that a bank’s liabilities and sales in a particular foreign currency exceeds the assets and purchases of that currency.

In order to avoid risk on account of exchange rate movements, the bank having an oversold position would correct it by buying that currency from the market and conversely, the bank having an overbought position would sell that currency to the market.

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