Currency Risk.

When trading currencies, the main cause of losses is currency exchange risks, which can sometimes reach several tens of percent. And in speculative forex trading, they can reach 100% of the trader's deposit.

Currency risk is the risk of losing a certain amount as a result of an unfavorable change in exchange rates or the price of precious metals.

This term refers to such areas of activity as import-export operations, banking activities and trading on the forex market.

1.    Import-export operations – in their activities, enterprises and companies selling their goods abroad or, conversely, importing them, often have to deal with the exchange of one currency for another.

Import risk Once goods are imported from abroad, they are sold for the national currency, and the next purchase requires another exchange of the received currency for the settlement currency. If the national currency depreciates, a currency risk arises, resulting in losses for the importer, as they can purchase a smaller volume of currency with the proceeds received.

Export risk – in this case, the opposite situation is observed: exporters suffer in the event of strengthening of the national currency, since the foreign currency becomes cheaper in relation to the national one, and in order to conduct business activities, the enterprise needs to exchange the received foreign currency.

2.    Banking activities – here currency risks are observed in transactions related to lending or the formation of bank assets.

Loans – when issuing a loan in one currency, the bank may always face a situation in which the exchange rate of the loan currency will decrease, resulting in a loss of profit.

Assets When building their reserves, banks, including national ones, use freely convertible currencies. While they prefer the most stable currencies, even the most stable currency can depreciate, resulting in losses due to exchange rate fluctuations.

3.    Trading – this area of ​​activity is most exposed to currency risk, since the process of Forex trading uses leverage, which increases losses from exchange rate fluctuations in proportion to its size.

For example, when trading using only one's own funds, an unfavorable exchange rate movement of 1% will result in a loss of 1%. However, when using 1:50 leverage, the loss will increase 50-fold, amounting to 50% of the trader's deposit. Therefore, when trading on the exchange, there is a direct correlation between the amount of leverage used and the size of the currency pair Forex risk.

Currency Risk is the main reason for the complete loss of all capital when trading on Forex.

Each of the listed areas of activity has its own ways of reducing risks: enterprises open forward transactions in advance, banks raise interest rates on loans and diversify their reserves, traders set stop orders or lock positions.