The ABC's of foreign exchange risk management

  on July 15 2013 4:48 PM

One of the biggest and most liquid of all financial markets is the foreign exchange market. With a daily transaction worth almost US$1.5 trillion, there is great opportunity for gain as well as high risk of loss to be sustained by market players such as banks, financial institutions and even individuals.

The main tipping point to determine if either gain or loss would be sustained is the fluctuations in the exchange rate. To properly manage the risks in these kinds of investments, it is imperative that an investor have some forex risk management tools on hand. One provider FXWELLS offers a cost-effective way to hedge corporate FX risk.

The basics on managing risk in forex transactions center on the following:

- The currency's value changes or fluctuates and this affects those individuals or institutions that are engaged in transactions using these currencies;

- The assets, liabilities and cash flows are affected when changes or fluctuations occur in the exchange rates between currencies.

Currency risk management addresses two kinds of risk, namely systematic and unsystematic risk. If it's a systematic risk, then all investments are affected. Samples are market risk, inflation risk and interest rates risk. On the other hand, unsystematic risk involves any event that affects a specific investment. These would be business risk as well as financial risk, both of which can be predicted or hedged.

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