Forex Risk Management

Liquidity The next risk factor to study is liquidity. In order to lessen the risk, Person A might ask Person B to show his apples, to make sure they are good to eat, before fixing the window. Hence, they might turn to online trading as a form of gambling rather than approaching trading as a professional business that requires proper speculative habits. Learn to overcome this big hurdle in Master Your Trading Mindtraps. This is known as sliding your stops. In the recent past, periods of exchange rate stability have bred complacency.

1. Risk Management Committee: The Risk Management Committee is set up for reviewing the treasury and forex operations. This committee would be formed with the following objectives: •Reviewing the current exposure of the company •Reviewing & reporting on the risks facing the company • Reviewing the entire forex operations. •Reviewing Trigger Levels.

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The resultant spurts in foreign investments led to substantial increase in the quantum of inflows and outflows in different currencies, with varying maturities. The reforms provided the economic rationale for the introduction of foreign exchange FX derivatives and risk management since then has under gone a paradigm shift.

With the dismantling of trade barriers, business houses started actively approaching foreign markets not only with their products but also to source capital and direct investment opportunities. India Inc today has reached the scale and size of the global order and several Indian organizations are today world leaders in their respective industries. Arriving on the global scenario subjects corporations to diversified revenue streams in various geographies, thus leading to invoicing in global currencies such as USD, GBP and EUR among others.

Similarly, access to various borrowing mechanisms and debt markets has also led to increased non-INR exposure on books. The heightened volatility and inability to predict rupee movements in recent times has led to severe pain on the part of corporations, irrespective of whether they have chosen to hedge their foreign exchange risks or not.

In India, there has been an increasing awareness for the need to introduce financial derivatives in order to enable hedging against market risks in a cost effective way. A dynamic foreign exchange market provides businesses with a spectrum of hedging products for effectively managing their foreign exchange risk exposures.

In the recent past, periods of exchange rate stability have bred complacency. Importers were confident that the Reserve Bank of India RBI would intervene to halt any rupee decline where as exporters were of the view that the Rupee has always been over rated and that there is no way that it shall appreciate from the present value. This traditional mindset has kept companies away from hedging their exposures. If the loss will be too much for you to bear, then you must not take the trade or else you will be severely stressed and unable to be objective as your trade proceeds.

Since risk is the opposite side of the coin to reward, you should draw a second line in the sand, which is where, if the market trades to that point, you will move your original cut-out line to secure your position. This is known as sliding your stops. This second line is the price at which you break even if the market cuts you out at that point. Once you are protected by a break-even stop, your risk has virtually been reduced to zero, as long as the market is very liquid and you know your trade will be executed at that price.

Make sure you understand the difference between stop orders , limit orders and market orders. Liquidity The next risk factor to study is liquidity.

Liquidity means that there are a sufficient number of buyers and sellers at current prices to easily and efficiently take your trade. In the case of the forex markets, liquidity, at least in the major currencies , is never a problem.

However, this liquidity is not necessarily available to all brokers and is not the same in all currency pairs. It is really the broker liquidity that will affect you as a trader. Unless you trade directly with a large forex dealing bank, you most likely will need to rely on an online broker to hold your account and to execute your trades accordingly.

Questions relating to broker risk are beyond the scope of this article, but large, well-known and well capitalized brokers should be fine for most retail online traders, at least in terms of having sufficient liquidity to effectively execute your trade. Risk per Trade Another aspect of risk is determined by how much trading capital you have available.

Risk per trade should always be a small percentage of your total capital. This is an unlikely scenario if you have a proper system for stacking the odds in your favor.

The way to measure risk per trade is by using your price chart. This is best demonstrated by looking at a chart as follows:. We have already determined that our first line in the sand stop loss should be drawn where we would cut out of the position if the market traded to this level.

The line is set at 1. To give the market a little room, I would set the stop loss to 1. A good place to enter the position would be at 1. The difference between this entry point and the exit point is therefore 50 pips. Let's assume you are trading mini lots. Leverage The next big risk magnifier is leverage. Leverage is the use of the bank's or broker's money rather than the strict use of your own. This is a A one pip loss in a However, one of the big benefits of trading the spot forex markets is the availability of high leverage.

This high leverage is available because the market is so liquid that it is easy to cut out of a position very quickly and, therefore, easier compared with most other markets to manage leveraged positions. Leverage of course cuts two ways. If you are leveraged and you make a profit, your returns are magnified very quickly but, in the converse, losses will erode your account just as quickly too. But of all the risks inherent in a trade, the hardest risk to manage, and by far the most common risk blamed for trader loss, is the bad habit patterns of the trader himself.

All traders have to take responsibility for their own decisions. In trading, losses are part of the norm, so a trader must learn to accept losses as part of the process. Losses are not failures. However, not taking a loss quickly is a failure of proper trade management.

Usually a trader, when his position moves into a loss, will second guess his system and wait for the loss to turn around and for the position to become profitable. This is fine for those occasions when the market does turn around, but it can be a disaster when the loss gets worse. Learn to overcome this big hurdle in Master Your Trading Mindtraps.

Introduction

Foreign Exchange Risk Management in India Written by Apoorv Srivastava Domestic Economy banking, capital markets, economy, ficci, Financial Derivatives, financial sector, Foreign Exchange, Forward Contracts, FX, india, Risk Management Comments are off. IFA Global is one of the leading Corporate Forex advisors and Treasury consulting companies/firms in India & UAE, offering end to end FX hedging solutions, Treasury Risk Management solutions, Debt Syndication & Structured trade Finance Advisory. Request PDF on ResearchGate | Forex Risk Management Strategies for Indian IT Companies | Foreign exchange risk is the effect that unanticipated exchange rate changes have on the value of the firm. There are a variety of strategies which are designed to manage foreign exchange risk.