Where the liabilities and sales of a bank in a particular foreign currency exceed the assets and purchase of the same currency the bank is said to have a “short” or “oversold” in that currency. if the bank maintains an “oversold” position in a particular currency and there occurs an appreciation of the currency, a loss would occur.
Where the assets and purchase of a particular currency exceed the liabilities and sale of the same currency, this imbalance is termed as “long” or “overbought” position. if the bank had “overbought” position and the currency depreciates, there would be loss.
This means at any given point of time, the assets and liabilities of a bank in any foreign currency are equal i.e. there is neither any excess of assets over liabilities nor excess of liabilities over assets in that currency. To square a position the bank has to sell (if overbought) or buy (oversold) that currency either spot or forward depending on the balance in the NOSTRO A/C