Question

Q:What was the main drawback of Net Open Position(NOP) ?,WHY regulators prefer Foreign Exchange Exposure Limit (FEEL) over NOP?

Answer 1

Net open Position (NOP) is the total sum of the Foreign currency assets and liabilities, it is usually of the banks or the financial institutions. It includes the forward and the spot transactions of the financial institutions and banks as well as its off the balancesheet items of Foreign currency.

The Drawback of the Net Open Position:

The volatility of the exchange rate in open short and long currency position can lead to heavy losses. Heavy capital needed as a backup to cover up the losses, just in case.

Foreign Exchange Exposure Limit: It sets risk exposure to a limit of 20% of the capital irrespective of the position (short/long) in the market, where as in NOP Capital needs to be managed depending upon the risk associated with the position (short/long) in the market. FEEL makes it easy to regulate and monitor and sustain the risk exposure of the companies to a certain limit. Ususally applicable to financial institutions which is vital for any country thus regulation and control of which is very important.

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