Currency Risk.

When dealing with currencies, the main reason why losses occur is currency risks, sometimes their value can reach several tens of percent. And with speculative trading on Forex and 100% of the trader’s deposit amount.

Currency risk is the risk of losing a certain amount as a result of unfavorable changes in exchange rates or the price of banking metals.

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

1.    Import-export operations – in their activities, enterprises and companies that sell their goods abroad or, on the contrary, import, often have to deal with the exchange of one monetary unit for another.

Import risk – after goods have been imported from abroad, they are sold for national currency, and for the next purchase it is necessary to again exchange the received money supply for the payment currency. And if the national currency depreciates, a currency risk arises, as a result of which the importer suffers losses, since he can already purchase a smaller amount of currency with the proceeds received.

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

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

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

Assets – when forming their reserves, banks, including national ones, use freely convertible currencies. Giving preference to the most stable monetary units, but even the most stable currency can become cheaper, which also results in losses due to exchange rate fluctuations.

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

For example, when trading using only your own funds, an unfavorable exchange rate movement of 1% will correspondingly cause a loss of 1%. In the same case, when a leverage of 1:50 is used, the amount of losses will increase 50 times and will already amount to 50% of the trader’s deposit. Therefore, when trading on the stock exchange, there is a direct relationship between the amount of leverage used and the amount of currency risk on forex.

It is Currency Risk that 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 to reduce risks - enterprises open forward transactions in advance, banks increase loan rates and diversify their reserves, traders set stop orders or lock positions.