The Treasury operations in the forex (foreign exchange) market are between the banks. The inter-bank foreign currency operations are taking place for two purposes namely (t). Buying and selling foreign currency on behalf of their customers as an intermediary, (ii). Proprietary trading (buying and selling currencies on its own account) with an intention to make money on the movement of the exchange rate.
Banks fix limits to
their treasury/forex operation to reduce the exposure to various risks, such as
liquidity risk, market risk, credit risk, and operational risk. By limiting the
size, duration, and frequency of their foreign exchange transactions, banks can
control the potential losses and optimize the profitability of their treasury
operations. Setting limits helps ensure that the bank's activities remain
within acceptable levels of risk, align with regulatory requirements, and
safeguard the overall financial health of the institution
Some example of dealing
limits for forex dealers are Daylight limit: The Daylight/Intraday Limit is the
maximum position allowed by the management that can be taken during the course
of the trading session by the dealers in a particular trading day. The highest
amount of open position or exposure, the bank can expose itself at any time
during the day, to meet customers' needs or for its trading operations.
Overnight
limit: The highest amount of open position or exposure, a
bank can keep overnight when markets in its time zone are closed. Traders want
to hold trades overnight either to increase their profit or in hopes that a
losing trade will be reduced or turned into a profit the following day. In the
case of the currency markets, they may seek to benefit from a cash return, or
rollover rate, on the difference between the two interest rates of the
currencies they're pairing in their position.
Gap
limit: The maximum inter-period/month exposures which a
bank can keep. Gaps occur when there is a significant difference between the
closing price of the previous trading session and the opening price of the next
session, resulting in a visible gap on price charts.
Counterparty Limit: The maximum amount that a bank can expose itself to a particular counterparty.