Forex deals in trading of currency pairs. Investors do activities on guess basis and sometimes luck may not work properly. When the trade moves against an investor, it is a risk that anyone may not be able to handle. This is mostly related to forex markets. Mostly such transactions are done by financial institutions and not by individuals. They use it to reduce the risk of currency fluctuations. If an investment is generating profit, then it has some risk also associated to it. So, let’s discuss some risks associated with FX market before you invest:
Exchange rate risk:
This is associated with change in the value of currency. It is affected by change in demand and supply balance. The position of trader depends on change in currency at anytime and anywhere in the world.
Interest rate risk
The risk is related to profits and losses occur due to market fluctuations in forward spread with mismatch in forward amount and also maturity gap among foreign transactions. Depending on maturity dates, one should separate the mismatches up to six months and past six months.
Due to a reason of voluntary and non voluntary there may be chance that an outstanding currency may not be possible to be repaid as decided. This is mostly possible in corporations and banks. This is quite low in case of individual trader.
This happens at a time when parties find a condition of a risk for not receiving funds from the banks.
Due to different time zone on various countries, this mainly happens. The payment is made firstly to insolvent parties then those who are still in market. While assessing the credit risk, you must check out potential exposure of portfolios along with market value of currency. This you can judge by probability analysis at maturity period of outstanding position. Presently, computers are making it easy to implement credit risk policy.
Leverage risk, transactional risk and risk of ruin are other risks associated with this market. It is important to be sure before any investment in such markets. This is one of the best ways to increase your income, but it is equally true that higher risk is associated with higher profits and vice versa.
Finding them is not so easy but you may lose all or gain more than expected. This is an unpredictable market so be sure before investing your hard earned money in it.
Well, this is a list of just few risk associate with trading in forex market. To know more and be safe it is a good idea to associate with a partner who is an experienced professional in domain.
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