Central bank purchases and sales of securities, outright or through repo, used to add or drain reserves and keep the overnight rate inside the target range.
In the scarce-reserves era OMOs were the daily mechanism of policy: the desk added or drained a few billion each morning to hit the funds target. In the ample-reserves era they are mostly standing facilities that cap and floor the market rate rather than fine-tune it.
Example: GC repo trades 12 basis points above iorb on quarter-end. Dealers borrow $30 billion at the standing facility rate, which caps the squeeze and pulls repo back toward the top of the target-range.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Risk and reward on one trade. One trade on a price scale: the entry sits 2.00 points above the stop and 6.00 points below the target, so the shaded reward band is three times the risk band. The ratio compares what is lost if the stop is hit with what is gained if the target is reached.
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