Risks Associated with Forex Trading, Forex Trading Risks

Tuesday, April 29, 2008

Risks Associated with Forex Trading

Although Forex trading is becoming the number one choice for many novice traders to make profit, it is not at all free of risk. There are many other risks associated with Forex trading other than the common ‘trading risk’ that occurs as a result of price difference.

Credit risk or default risk – Credit risk in Forex trading occurs when the counter party fails to payoff the currency position as agreed. This happens when the counter party has planned to payoff you from future cash flow, which does not occur as planned.
Replacement risk or Replacement cost risk – Occurs when one needs to replace a contract, because the counter party fails to meet the terms of contract. The markets/prices may be changed from original, so the replacement contact now has to deal with new changes.
Settlement risk – This occurs as a result of difference in prices at different time zones of the world. The creation of CLS (Continuously Linked Settlement) has eliminated the time differences.
Exchange rate risk or currency risk – occurs as a result of changes in exchanger rate.
Interest rate risk – occurs as a result of changes in interest rate by central banks. Affects Forex futures contracts more than spot contracts.
Dictatorship risk – occurs when Governments impose restrictions or interferes with currency trading activities.