Module: | MODULE B: RISK MANAGEMENT
Q359: Consider the following statements comparing Daylight Open Position Limits and Overnight Open Position (OVP) Limits in a bank's treasury:
1. Daylight limits govern the maximum unhedged forex exposure a dealer can hold during active trading hours to capitalize on intraday market volatility.
2. Overnight limits are generally structurally larger than Daylight limits because markets are considered less volatile when local trading desks are closed.
3. Any open position that is not squared off before the end of the trading day automatically consumes the bank's Overnight limit and carries overnight settlement and price risk.
2. Overnight limits are generally structurally larger than Daylight limits because markets are considered less volatile when local trading desks are closed.
3. Any open position that is not squared off before the end of the trading day automatically consumes the bank's Overnight limit and carries overnight settlement and price risk.
✅ Correct Answer: B
The correct answer is B. Statement 1 is correct: Daylight Open Position Limits allow dealers to hold unhedged exposures during business hours to facilitate market-making and capture intraday profit opportunities.
Statement 3 is correct: If a dealer cannot or chooses not to close out an intraday position before the designated end-of-day cutoff, that exposure rolls over and consumes the bank's Overnight Open Position (OVP) limit, exposing the bank to overnight gap risk.
Statement 2 is incorrect due to a fundamental flaw in risk logic.
Overnight limits are structurally much SMALLER than Daylight limits.
When the local dealing room is closed, the bank cannot react to adverse global news or price movements in international markets (like New York or Tokyo). Because the bank is effectively "blind" and unable to manage the position actively, overnight risk is much higher, requiring a much tighter limit.
Statement 3 is correct: If a dealer cannot or chooses not to close out an intraday position before the designated end-of-day cutoff, that exposure rolls over and consumes the bank's Overnight Open Position (OVP) limit, exposing the bank to overnight gap risk.
Statement 2 is incorrect due to a fundamental flaw in risk logic.
Overnight limits are structurally much SMALLER than Daylight limits.
When the local dealing room is closed, the bank cannot react to adverse global news or price movements in international markets (like New York or Tokyo). Because the bank is effectively "blind" and unable to manage the position actively, overnight risk is much higher, requiring a much tighter limit.