The term Forex Market means Foreign Exchange Market where forex traders do buy and sell global currencies worldwide. Stock market is the ultimate goal of a Forex Trader is to make as much profit as possible by buying the currency at low rates and sell them at high prices, right?
Foreign Exchange also offers the flexibility to forex traders because of various currencies to choose from as opposed to limited sectors in the market and various companies they are offering the stock market.
All the banks whether it is public sectors or private sectors they have to face exchange risks because of their activities relating to global currency trading, risk management on behalf of their clients as well as risks of their own balance sheet and operations. So, there are various types of risks banking sectors are follows like following:
The appreciation or depreciation of one currency supposes, say USD to another currency like base currency INR (Indian Rupees). Ensure that every bank has a long or short position in terms of currency they need to deal through depreciation in case of long-term position or appreciation in case of short position that runs the risk of loss to the bank, this is called the risk on exchange rate.
This types of risk is mainly affects to the businesses, investors and traders those make investment exposure.
Take an example, if you have a CD(certificate of deposit) in the USA for amount of 1 million USD and the exchange rate is 65 INR(means 1USD=Rs.65) then you have Rs. 6,50,00,000 in the certificate of deposit currently. More so if the exchange rate changes significantly to Rs.50 : 1 USD, then the you have only Rs.5,00,00,000 in the CD that means your CD value is not fixed that is valued as per current market rates even though you have still 1 million USD. This risk should know every traders before investing into forex markets.
Credit risk is associated with an investment where the borrower is not able to pay back the amount to the banks or lenders. This situation comes while financial condition will be poor of the borrower. So generally credit risk is always gone with the borrower. The Credit risk may be applied either during the contract period or at the maturity date. Credit risk management is the practice of avoiding losses by understanding the adequacy of a bank’s capital and loan loss reserves at any given time.
Liquidity risk means cash crunch for a temporary time or short-term period and such situations generally have an adverse impact on any business and profit making organization.
Liquidity always refers to how buyers and sellers of a market. It is the probability of loss arising from a situation where, there is not enough cash amount to meet the needs for depositors as well as borrowers. So however, the sale of illiquid assets will by yield less than the fair value and the sale of illiquid asset will not be possible at the desired time due to lack of proper buyers.
This types of risk especially related to the operations of the banks or forex brokers. Sometimes this is the probability of loss occurred due to internal shortage of a bank or may be a breakdown related to internal issues by its control, operations or procedures.
Sometime the interest rate risk is the possibility that the value of an investment by the bank will be declined by which you can’t be expected as a result.
Interest rate risk arises on investment in a Fixed Rate Bond. If the interest rate rises, then market value of the bond will be same, because of fixed rate and since the rate being paid on the bond is now lower than the current market rate. However, the investor will take less interest to buy the bond as the market price of the bond goes down due to decline in the market. Here the loss is you could realize once the bond is sold or reaches its maturity date.
Sometimes country risk can provide a great loss to the investors by investing or lending possibly due to economic and or political environment in the buyer’s country by which it may cause in an inability to pay for imports.