One of the most important aspects of trading on the Forex exchange is the awareness of the transaction risk. A trader needs to be aware of how much money they are putting at risk. In general, there is no problem with liquidity in the forex market. The spot cash forex market is estimated to trade for $2 trillion daily. However, you still have to be wary of the volatility of the currency pair you choose.
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Spreads and maturity gaps
Interest rate risk refers to the profit generated on forward spreads and maturity gaps. This is applicable to currency swaps, forward outright, futures, options, and currency pairs. The risk can be reduced by setting limits for the mismatches. A common approach is to segregate these mismatches by maturity. A computerized system calculates positions for all dates of delivery. This allows traders to avoid exposing themselves to interest rate fluctuations.
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Exchange rate risk is the most important currency risk. The currency value fluctuates on a continuous basis based on the supply and demand balances around the world. The exchange rate of one currency relative to another can fluctuate substantially. As a result, it is imperative to understand and manage these risks. This is particularly important in the case of the Forex market, which is largely unregulated and has no daily price limits.
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