Welcome to Interbank Currency Trading
Introduction to FOREX
Foreign Exchange Risk - It is the possibility that an abrupt shift in the rate of exchange will change the home currency value of foreign currency cash payments that is to be expected from a foreign source. Also the possibilty that an unexpected shift in exchange rates will change the value of home currency required to repay a debt that is denominated in a foreign currency
In other words, if you are expecting that you will receive payment in the form of euros, there is that probable risk that the Euro will weaken against your local currency before you receive the payment. Or the other way around, if you have to make a payment in Pesos', the risk is that the Peso will strengthen before you make the payment.
Risk aversion
As with all types of risk, it's either you accept it or take a course of action to remedy or reduce such risk. In the study of Financial Management its learners assume that many people are generally risk averse and prefer to reduce or at the most eliminate risk if they can do so without having to spend too great a cost. This method particularly applies to businesses that is aiming to concentrate on their main line of work and wherein foreign exchange risk is an unneeded complication. There are a several ways in reducing risk in foreign exchange, but from the start it should be appreciated that reducing the risk of making a foreign currency loss will generally also have an efect as regards to a reduced opportunity for making a currency gain.
Import-export companies
Let us consider a company in which their business is to buy and sell goods/product/services from different foreign countries, and in which purchases and sales are on several weeks', or months' credit. If such a company does not consider its currency risk, there is a good possibility that they can incur exchange losses that can seriously reduce their profit. This is a situation where being idle or doing nothing would result to accepting unnecessary risk. A way of managing the risks is to 'hedge' the foreign exchange transactions.
Hedging
A hedge is the purchase of a contract, financial instruments, including forward foreign exchange contract, and any physical goods that has the ability to appreciate in its value and will offset a possible drop in value of another contract or phusical good, protecting the owner from loss, but at he same time preventing him from a gain.
