Managing Foreign Exchange Risks

Foreign exchange market is a two edged sword. It can work both ways, thus one can either make lots of money of lose lots of money. Hence, in order to trade with confidence and avoid any mistakes, it is essential to know all about managing foreign exchange risks.

Foreign Exchange risk is the effect that an unforeseen exchange rate changes have on the value of the firm. This page explores the foreign exchange risk management subject for the benefit of our visitors.

You will com across many institutions or firms refraining from managing risks in foreign exchange. There are a number of reasons behind this. They believe that any use of risk management tools is speculative. Or they argue that managing risks in currency exchange lies outside the firm's field of expertise.

But there can not be any economic justification for a "do nothing" strategy. Let us now throw some light on the subject of how to manage forex risks.

Identifying and analyzing exposure is the first step in managing foreign exchange risks. It is equally important to study the nature and magnitude of exposure. In other words, identifying what is at risk, and in what way. The task of computing the impact of exchange rate changes on an enterprise begins with measuring its exposure, that is, the amount, or value, at risk.

Keeping up with the Market Forecasts and news play an important role in foreign exchange risk management. Forecasting foreign exchange rate changes is important for planning and decision-making purposes.

Risk Appraisal is another important factor to consider while managing risks in currency exchange. It is important to know the various risk types and their impact. Interest Rate risk, Credit risk, Country risk and Exchange Rate risk are present due to the unsteady markets and political events.

Even the most veteran traders can't foresee with absolute certainty how the market is going to fluctuate. Therefore one should use tools like Stop-Loss Orders to manage forex risks and losses during trading. Stop loss orders are often used together with limit orders to automatize Forex trading.

One should make sure that the cost of the money market hedge should be the same as the forward or futures market hedge. The money market hedge suits many companies. But if a money market hedge is to be done for its own sake, the firm ends up losing on the spread.

To sum up, we can say that managing foreign exchange risks is not an easy subject. But by effectively gathering and digesting a large volume of information, it is possible to manage forex risks and minimize them.