risks-by-foreign-exchange-on-forex

As it was mentioned above the trading on the Forex is essentially risk-bearing. By the evaluation ofthe grade of a possible risk accounted should be the following kinds of it: exchange rate risk, interest raterisk, and credit risk, country risk.Exchange rate risk. Exchange rate risk is the effect of the continuous shift in the worldwidemarket supply and demand balance on an outstanding foreign exchange position. For the period it isoutstanding, the position will be subject to all the price changes.The most popular measures to cut losses short and ride profitable positions that losses should be keptwithin manageable limits are the position limit and the loss limit. By the position limitation a maximumamount of a certain currency a trader is allowed to carry at any single time during the regular trading hours isto be established. The loss limit is a measure designed to avoid unsustainable losses made by traders bymeans of stop-loss levels setting.Interest rate risk. Interest rate risk refers to the profit and loss generated by fluctuations in theforward spreads, along with forward amount mismatches and maturity gaps among transactions in theforeign exchange book. This risk is pertinent to currency swaps, forward outright, futures, and options (Seebelow). To minimize interest rate risk, one sets limits on the total size of mismatches. A common approachis to separate the mismatches, based on their maturity dates, into up to six months and past six months.All the transactions are entered in computerized systems in order to calculate the positions for all thedates of the delivery, gains and losses. Continuous analysis of the interest rate environment is necessary toforecast any changes that may impact on the outstanding gaps. Credit risk. Credit risk refers to the possibility that an outstanding currency position may not berepaid as agreed, due to a voluntary or involuntary action by a counter party. In these cases, tradingoccurs on regulated exchanges, such as the clearinghouse of Chicago. The following forms of credit riskare known:1. Replacement risk occurs when counterparties of the failed bank find their books are subjectedto the danger not to get refunds from the bank, where appropriate accounts became unbalanced. 2. Settlement risk occurs because of the time zones on different continents. Consequently,currencies may be traded at the different price at different times during the trading day. Australian and NewZealand dollars are credited first, then Japanese yen, followed by the European currencies and ending withthe U.S. dollar. Therefore, payment may be made to a party that will declare insolvency (or be declaredinsolvent) immediately after, but prior to executing its own payments. Therefore in assessing the credit risk, end users must consider not only the market value of theircurrency portfolios, but also the potential exposure of these portfolios. The potential exposure may bedetermined through probability analysis over the time to maturity of the outstanding position. Thecomputerized systems currently available are very useful in implementing credit risk policies. Credit linesare easily monitored. In addition, the matching systems introduced in foreign exchange since April 1993 areused by traders for credit policy implementation as well. Traders input the total line of credit for a specificcounterparty. During the trading session, the line of credit is automatically adjusted. If the line is fully used,the system will prevent the trader from further dealing with that counterparty. After maturity, the creditline reverts to its original level.Dictatorship risk. Dictatorship (sovereign) risk refers to the government's interference in the Forexactivity. Although theoretically present in all foreign exchange instruments, currency futures are, for allpractical purposes, excepted from country risk, because the major currency futures markets are located inthe USA. Hence, traders have to realize that kind of the risk and be in state to account possible