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Forex Trading a well-designed risk management strategy

on Mon Jan 18, 2016 9:00 pm
ALAPRI helps investors navigate a challenging market

A well-designed risk management strategy can reduce the risks and costs for investors, particularly when it comes to currency trading

The first recorded use of the word hedge – meaning to dodge or evade – can be traced back to the 1590s, and an understanding of the process is arguably more important in the current financial climate than it ever has been. Recent events have alerted investors to the dangers of excessive risk-taking and the pitfalls of trading without paying due attention to risk management, particularly for currency traders.

Participation in the largest of all financial markets comes with its fair share of challenges, and hedging has become a key strategic consideration for any and all involved, whether it be simple or complex in design.

Employed often as a risk management strategy to either limit or offset the probability of losses from fluctuations in commodities prices, securities or currencies, hedging, more than this, serves a number of additional functions.

Used also in investment employment to mimimise the risk of adverse price movements, or as a means of transferring risk without buying insurance policies, the risks in question can take very different forms, meaning that there is no single solution when it comes to mitigating the damages.

Commodity risk, for example, arises when adverse price movements impact the value of contracts, and the hedging strategy in this instance calls for commodities’ future or contracts for difference (CFDs); credit risk, on the other hand, arises when the money owed isn’t paid by an obligor, and asks that obligations are sold at a discounted rate.

These risks take all manner of shapes, and include interest rate, equity, volatility and volumetric risk, though it’s when it comes to currency risk that the strategy is arguably most important.

On this last point, the risks stem from multi-currency activities undertaken by financial and non-financial actors in the global economy. And in answer to these activities, hedging strategies include forward and futures currency contracts, as well as money market operations.
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