What is Inter-banks Dealings?
INTER-BANK Deals refer to purchase and sale of foreign exchange between the banks. In other words, it refers to the foreign exchange dealings of a bank in the inter-bank market.
Purchase and Sale of foreign currency in the market undertaken to acquire or dispose of foreign exchange required or acquired as a consequence of its dealings with its customers is known as the ‘cover deal’. The purpose of cover deal is to insure the bank against any fluctuation in the exchange rates.
We have seen that is quoting a rate to the customer the bank is guided by the interbank rate to which it adds or deducts its margin, and arrives at the rate it quotes to the customer. For example, if it is buying dollar from the customer spot, it takes interbank buying rate, deducts its exchange margin and quotes the rate. This exercise is done on the assumption that immediately on purchase from the customer the bank would sell the foreign exchange to interbank market at market buying rate.
Since the foreign currency is a peculiar commodity with wide fluctuations in price, the bank would like to sell immediately whatever it purchases and whenever it sells 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 foreign exchange near zero. The main reason for this is that the bank wants to reduce the exchange risk it faces to the minimum. Otherwise, any adverse change in the rates would affect its profits.
In the case of spot deals the transaction is quite simple. If the bank has purchased USD 10,000, it would endeavor to find another customer to whom it can sell this. If it succeeds, the profit would be the maximum because the bank determines both buying and selling rates and the margin between the rates is the maximum. It is cannot find another customer it sells in the interbank market where the rate is determined by the market conditions. The margin is narrower here.
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