Friday, December 2, 2011

Don't Underestimate Forex Risk Management Precautions.

By Dmitry Vasenyov

Perhaps you've already heard enough about Forex. It's an extremely volatile and chaotic financial business. Just imagine this fantastic daily turnover. I don't joke. It really approaches to three trillion US bucks. The entire world seems to be involved in Forex trading. Big national banks, ambitious corporations and companies derive profits from this on a regular basis. Of course individual investors also take advantage of it.

To my great regret the risk of losing money in the foreign exchange market is inevitable. So it's impossible to go about this financial business without undertaking any risks. Taking into consideration this extremely sensitive and crucial topic in this complicated industry, Forex traders should exercise some form of risk management just to avoid unnecessary losses that can kick them out of the game.

I'd like to inform you that there are certain things that every Forex trader needs to remember before he executes his deals. It's clear that you should be aware of all liabilities. You should know enough about cash flows as well as assets because all of this may affect the exchange rates. You should take solid risk management measures. Pay a special attention to translation exposure. Don't underestimate economic exposure and accounting. The same is true for real operating exposure.

Due to chaotic changes in the exchange rates, transactional exposures add a lot to high risks. I should stress that borrowing and lending of foreign currencies, import and export services and cash flows have an enormous impact on the exchange rates of different currency pairs. It's clear that you need to take it into account.

You should be aware of two key types of Forex risk. They are unsystematic and systematic risk. Systematic risk is associated with various business aspects. For instance I can mention interest rate risk, inflation risk and market risk. Unsystematic risk is rather a specific thing. Business and financial risk are probably the best examples here. You need to be very attentive and careful to preserve your trading capital.

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