FX Risk Management Concepts
Category: Risk Management | Nov 27, 2009 |
Whether you’re a rank beginner or experienced trader, if you want long term success in the markets then you need to seriously consider your foreign exchange risk management strategies.
Most traders, if they think of risk at all, only think about market risk. That is how changes in the value of the currency we are trading affect our funds. However there are 5 major types of risk when trading forex and it’s important you understand each of them.
In this article we’ll explore the 5 different types of risk you’re exposed to when trading the forex markets, and ways you can lessen, or even eliminate, your exposure.
Please do not take this as an exhaustive list, nor as a deterrent to trading, it is only meant to help expand your awareness of foreign exchange risk management and prepare you for a long term, profitable run as a forex trader.
The 5 Major Risks in Forex and How To Manage Them
#1. Broker Risk: A broker is a business like any other, and as such they can face the same problems any regular business can, including bankruptcy.
As you might remember, in 2005 Refco went bankrupt and they were one of the world’s largest investment and brokerage firms involved in forex.
Always spend some time thoroughly investigating potential brokers before you get seriously involved with them.
#2 Tech Risks: There’s no doubt that computer, power or Internet issues could seriously dampen your results in the markets. With trades sometimes needing to be made at precise times, and Murphy’s law in full effect, you should always prepare for the worst when it comes to technology.
I strongly suggest you backup your computer on a daily basis, preferably to an off-site location you can backup from in case of fire or theft. Traders with serious commitment to the markets, or sizable portfolios, should invest in fail-safe backup systems including generators and surge protectors.
It might seem like overkill now but may just save your skin in an emergency.
#3 Market Risk: How market changes affect your positions. The most common type of risk people associate with forex.
The most sure-fire way to alleviate market risk is to trade using a proven trading system that integrates foreign exchange risk management strategies at the base level.
This includes having set entry and exit points, profit targets, and stop losses.
#4. Political Risks and Economic Risks: Major changes in political policies, large scale economical emergencies and intervention from a country’s governing authority can all effect the value of a currency.
Again, trading using a proven system with sound foreign exchange risk management strategies built-in can help defend these types of risks.
#5 Country Specific Risk: Last of all we have country specific risk — the risk of a country defaulting on it’s financial commitments.
When this happens the effects trickle down to all other financial instruments in the country and the other countries it’s doing business with.
You can avoid these risk by trading only the major currencies and staying clear of emerging markets and countries with serious financial deficits.
As you can see, there are many more risks involved with forex than just market risk. Broker, technology, market, economic and country risk must all be taken into account and mitigated.
The good news is risks can be managed and mitigated, and most sophisticated forex trading systems already have strategies for dealing with these risks.
However, even the most sound foreign currency risk management strategies are still not perfect, and there will always be some risk involved when trading. Always use your own best judgement about your risk tolerance levels and never trade above your head.
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I Agree!!
NOLS seems quite ahead of the curve in terms of advertising, promoting and engaging in new media to promote itself and our industry, nice!
Understanding and allocation of risks involved in any investment or work is called risk management. First, you need to do a thorough study of the subject to understand the risks involved. Then for each risk you choose a way to allocate it such as buying insurance or having some contractual obligations for other parties involved in the work or the investment.
If some competent engineer/analyst has done a FMECA or FMEA, an FTA, and other safety analyses. AND, these analyses have been peer-reviewed and corrected (if necessary), then I see no need for further modelling.
If the system in question is dynamic (changing part types, changing design, changing configuration), then yes, an ongoing model with a full-time or most-time risk manager may be necessary.
Even if the risk manager is not doing his/her job, a continuing model wouldn't be necessary. A simple peer review of the existing models and analyses would be all that is necessary.
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http://www.meridianlink.com/articles/security_risk.pdf
http://www.netaddiction.com/articles/eia_framework.pdf
http://www.thefreelibrary.com/Internet+Risk+Impact+Summary+Report+for+Q3+2003-a0113377379
First you need to learn to spell interpretation correctly. Mistakes like that in a resume are really damaging.
You may find a course at a community college. I took one from Dun & Bradstreet by correspondence years and years ago and found it quite helpful.
In business, the term operational risk management (ORM) is the oversight of many forms of day-to-day operational risk including the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Operational risk does not include market risk or credit risk.
Good for you. But there is no such thing as MBA in risk management, or MBA in marketing, of MBA in finance. The MBA is a general broad degree covering a wide variety of business issues and training students for careers in managing any area of business up to CEO. MBA students study accounting, finance, marketing, statistics, management, economics, strategy, policy, leadership and similar courses. The MBA was developed because people with technical backgrounds getting promoted into management are not always able to manage, and people in management often don't understand the technical fields they manage. That's why MBA programs prefer students with degrees in other than business and with 2-4 years of work experience. Their graduates learn to manage and can speak the language of the people they manage, whether that is engineering, chemistry, medicine, music, or any other field.
Many MBA programs offer concentrations, but this usually amounts to 2-3 elective courses in a specific field in the second year of the program. So don't worry about a concentration but be careful in choosing the right program. If you find one with Risk Management courses, consider the quality of the school first, and the concentration second.
Before you consider which MBA program is for you, consult the Official MBA Guide, a comprehensive free public service with more than 2,000 MBA programs listed worldwide. It allows you to search for programs by location (US, Europe, Far East, etc.), by concentration (finance, marketing, aviation management, health management, accounting, etc.), by type of program (full-time, distance learning, part-time, etc), and by listing your own criteria and preferences to get a list of universities that satisfy your needs. You can use the Guide to contact schools of your choice, examine their data, visit their web site, and send them pre applications. You can see lists of top 40 schools ranked by starting salaries of graduates, GMAT scores, and other criteria. It's the best service available at http://officialmbaguide.org.
You'd do a lot better researching the general principles of risk management strategy before asking individual insurers (it's a huge subject)
You can read up on various principles through the IAIS which is pretty much the lead organisation in the world for setting requirements for insurers.
http://www.iaisweb.org/index.cfm?pageID=2
Also ..a personal tip …. although obviously rules are different from jurisdiction to jurisdiction, some of the most comprehensive and yet concise I've seen are the Australian ones (they are very hot on risk management in Aus).
You can read the guidance notes here….
http://www.apra.gov.au/General/General-Insurance-PPGs.cfm
That way you can target your questions and get a much better response
What is Quality Assurance?
The answer will be something along the lines of fitness for purpose.
Also, perhaps you could do a bit of research on the Prince2 project methodology…….it covers all of the areas you are interested in.