Direct Answer
Position limits are predefined financial ceilings that dictate the maximum foreign exchange risk a bank can carry at any moment
Statement I is correct. The Daylight limit or Intraday limit allows dealers to take larger temporary positions during the day when markets are highly liquid and they can quickly react to news. Statement II is incorrect. The Overnight limit is always significantly smaller, not larger, than the Daylight limit. When domestic markets close, international markets like New York or Tokyo continue trading. An adverse geopolitical event during the night could cause a massive gap in currency prices by the time the domestic market opens the next morning. Banks strictly minimize overnight open positions to mitigate this gap risk. Statement III is correct. An open position only exists when there is a mismatch between assets, meaning purchases, and liabilities, meaning sales, in a specific currency. Perfectly matching buys and sells creates a square position, neutralizing market risk.