Exchange Rate Risk
Exchange rate risk is a consequence of the continuous shift in the worldwide market supply and demand balance on an outstanding foreign exchange position. A position will be a subject to all the price changes as long as it is outstanding.
In order to cut losses short and ride profitable positions, losses should be kept within manageable limits. The most popular are the position limit and the loss limit. (The limits are a function of the policy of the banks along with the skills of the traders and their specific areas of expertise.)
There are two types of position limits:
- Daylight: This position limit establishes the maximum amount of a certain currency which a trader is allowed to carry at any single time. The limit should reflect both the trader's level of trading skills and the amount at which a trader peaks.
- Overnight: This position limit (which should be smaller than daylight limits) refers to any outstanding position kept overnight by traders. In reality, the majority of foreign exchange traders do not hold overnight positions.
The loss limit is a measure to avoid unsustainable losses made by traders; which is enforced by the senior officers in the dealing center. The loss limits are selected on a daily and monthly basis by top management.
The position and loss limits can now be implemented more conveniently with the help of computerized systems which enable the treasurer and the chief trader to have continuous, instantaneous, and comprehensive access to accurate figures for all the positions and the profit and loss. This information may also be delivered from all the branches abroad into the headquarters terminals.
To continue learning about the types of foreign exchange risks, click on the link below.
Return from Exchange Rate Risk to Forex Risks.
And to skip it and go straight to get a deeper sense of what forex is all about, click on the link below.
Return from Exchange Rate Risk to Foreign Exchange Center.