Dealings between Forex Trading divisions of Bankers

Posted by TomShort on July 15, 2009 under Daily Forex review | Be the First to Comment

Dealings between Forex trading divisions of bankers’ deals refer to purchase and sale of trading online between the banks.  In other works, it also refers to the forex trading dealings of a bank in the interbank market.

Purchase as well as sale of foreign currency in the market undertaken to dispose or acquire of trading online acquired or required as a result of its dealings with its customers is called as the cover deal.  The purpose of cover deal is to insure the bank against any variation in the rates of exchange.

We have seen that in quoting a rate to the customer the bank is guided by the rate of interbank to which it deducts or adds its margin, and arrives at the rate it quotes to the customer.  For instance, if it is buying dollar from the customer spot, it takes interbank buying rate, deducts its exchange margin as well as quotes the rate.  This exercise is done on the assumption that immediately on purchase from the customer the bank would sell the real trading online to interbank market at market buying rate.

Since the real trading online currency is an irregular commodity with wide range of fluctuations in cost, immediately the bank likes to sell whatever they purchased and whenever they sell it goes to the market and makes an immediate purchase to meet its commitment.  In other words, the bank would like to keep its stock of real trading online near zero.  The main reason for this is that the bank needs to reduce the risk of exchange that it faces to the minimum.  Or else, any unfavorable change in the rates would affect its benefits.

In the case of spot deals the operations is quite simple. If the bank has purchased $10,000, if would endeavor to find another customer to whom it can sell this.  If it succeeds, the profit would be the maximum because both selling and buying rates are determined by the bank and the margin between the rates is the maximum.  If it, cannot find another customer, it sells in the interbank market where the rate is determined by the market conditions.  The margin is narrower here.

Trading Forex refers to sale and purchase of Forex in the market other than to cover bank’s business dealings with the customers.  The purpose may be to gain on the expected changes in the rates of exchange.  Funding of nostro account of the bank is done by realization of trading online in the relevant currency purchased by the bank.  If sales exceed purchases to avoid overdraft in the nostro account, the bank would purchase the requisite trading Forex in the interbank market and arrange for its credit to the nostro account.

Thus, some of the foreign banks who maintain nostro accounts with the bank may fund the account by arranging remittance through some other bank.  When required to quote a rate for this business deals, the bank would quote the rate at which it could dispose of the trading online, that is, the market buying rate.  Margin of exchange may not be taken for such business deals.