Although the forex market has been an alluring prospect for making a hefty in quick time, it is fraught with risks. In case of injudicious transactions, these risks can rise manifolds and the investors or traders might suffer huge losses.
The risks at the forex trading can be due to various factors and they can be listed as follows –
· Risks due to the interest rate – This type of risks in the forest markets occur when there is a substantial mismatch in the forward amount along with the differences in the maturity amounts in the forex transactions.
In order to curtail this mismatch, a bar is set up, up to which the mismatch are allowed.
· The risks due to the exchange rates – The position of the foreign exchange is mostly supply and demand driven. Hence, there is fluctuation in this market all the time. Risks due to the exchange rate are accrued on a outstanding forex position.
To minimise these losses there is bar setting a limit up to which a traders is allowed to conduct transaction during a certain period of time. This action minimises the loss that a trader or investor might suffer due to the change in the exchange rates.
· Credit risks – The credit risks forex market refers to the non-payment of an accruing currency position. This may be due some failure on the part of the other party. This types of credit risks may due to the following reasons –
Ø Settlement risks - This type of risks in the forex market might arise due to the difference in the time zone in different countries. The different currencies are credited at different times.
The Australian and New Zealand dollars are credited first and the US dollar is credited last. Hence, a company might get a payment first through the Australian dollar first and by the time its turn comes to pay in the US dollar, it might declare itself insolvency.
This way, the transactions that are to be held later are affected.
- Replacement risks – This type of risks occurs in the forex market, when the banks fail to make the payment and the counter parties are at receiving end of losses due to this.
Hence, proper study of the credit risks by the investors and traders should be analysed before doing the transactions at the forex market.
The market price of their currencies as well as the demand and exposure of them are to be taken into consideration for determining the amount of credit risks in the forex market.
These days, the credit lines of a particular of a particular party can be monitored with the computerised systems of transactions at the forex market.
Through the use of these credit lines, the potential threat of credit risks can prejudged and any further transaction with the counter party can be made to cease.
· Dictatorship risk – Governments of different countries try to monitor and mould the forex market according to their currency. The political stabilities also play a role in the risks involved in the transactions of the forex market.
These are some of the risks involved in the forex markets.