Understanding and Preparing for Risk

Forex market facilitates selling and buying of currencies across the globe. The end goal of forex trading is to make a profit just like any other form of business. The tactic here is to sell high and buy low. Trading volumes are large in the forex market. Because of large trading volumes, forex assets are referred to as liquid assets. Majority of forex trading is like swap, options, spot transactions and forward transactions. However, many risks are associated with forex trading.

Leverage risk is common in the forex market. In the forex market, leverage usually requires small initial investment. This investment is called margin. This will help an investor to gain access to foreign currencies. When there are fluctuations in the market, a trader is required to pay an additional margin called margin calls. Because forex trading is highly volatile, it will make investors make substantial losses due to aggressiveness in using leverage. They tend to use excess initial investment which is not supposed to be.

The second risk investor should consider interest rate risks. In basic macroeconomic, interest rates have a great impact on counter`s exchange rates. If the rate of interest is high in a certain country, there will be a lot of investments that will happen in that country because it will attract more investors. If the rate of interest is low, it will scare away investors. Due this effect that is not predictable, it will affect the forex prices in the market. If an investor is not careful, one will end up making a lot of losses.

Transaction risk is a common risk in the forex market. Transaction risks are the risk that is usually associated with a difference in time between the beginning of the contract and time it settles. Currencies are traded at different prices at different hours during the day. The greater the time difference, the greater amount of risk. The exchange risks fluctuate throughout the day. Transaction risks affect individuals and also companies that deal in forex trading.

Counterparty risk is also a risk that investors should consider. Counterparty in forex trading is a company that gives assets to an investor. Counterparty risk is the risk of default for the broker or dealer during a certain direction. In forwarding and spot contracts on forex, currencies are not always guaranteed by a clearing house. It is always decided by the solvency of the market. Because of the high volatility in the market, counterpart may sometimes refuse to adhere to contracts.

The last one is a country risk. When deciding the options to invest in forex trading, one should assess the stability and structure of the currency of the country. Central banks are responsible for sustaining reserves to help in maintaining fixed exchange rate. During the time of the transaction a currency crisis may occur. It will lead to the devaluation of the currency. It will have an impact on forex prices and trading. For smart investors, they will withdraw all the assets when they speculate that the currency they are dealing with will lose value in future.

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