Why Forex Risk Management Strategies are Key to Success in Globalization

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There are several issues in corporate finance more complex than managing foreign currency fluctuations. In most major economies, the exchange rate of a domestic currency against that of another country or economy is constantly floating, influenced by such factors as supply and demand of each currency, inflation projections, interest rate differentials, the economic health of the respective countries of origin , technical support issues and more. Furthermore, the foreign exchange (Forex or FX) market is totally decentralized, with trading occurring over the counter, completely electronically, at a dizzying speed. According to the Bank for International Settlements, the values for Forex trades average approximately $220 billion per hour.

Only Invest money you don’t need and forget about it for a short while:

This might sound obvious, but the first and foremost rule in currency trading, or any other kind of trading for that matter, is to only risk the money you can afford to lose. Many traders, especially beginners, skip this rule because they assume that it “won’t happen to them”.

Because it’s possible to lose all your trading capital, and secondly, because trading with funds you live on will add extra pressure and emotional stress to your trading, compromising your decision making abilities and increasing the chances of making mistakes.

All business is local:

The fastest-growing multi-national ecommerce companies are good examples of how important FX risk management is in supporting the scope, speed and profitability of expansion. U.S.-based companies, whose services are delivered locally in several countries, utilize a proprietary global digital application. While these kind of companies may settle all transactions in US dollars, their growing base of in-country suppliers is often paid in their respective local currencies, resulting in forcing the companies to maintain greater local currency balances in each of their in-country accounts.

The other challenge we highlighted to our clients is that their model requires them to manage and keep records on multiple banks for presentment and settlement and on their providers for disbursement. The result: operational inefficiencies, higher costs and greater risks.

Frontier management:

With the increase in Forex trading over the past few years, financial markets have become more widely inspected by regulators. In the US, a number of entities are responsible for monitoring the markets, from the Securities and Exchange Commission (SEC), to the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). In the United Kingdom, the Financial Conduct Authority (FCA) keeps a watchful eye for issues of market manipulation and illegal trading, and in Europe, the European Securities and Markets Authority (Esma), which creates directives at the European Union level for updating member states on changes in the marketplace.

SET YOUR RISK/REWARD RATIO TO A MINIMUM OF 1:3:

A risk/reward ratio (RRR) measures and compares the distance between your entry point and your stop-loss and take-profit orders. A RRR measures and compares the distance between your entry point and your stop-loss and take-profit orders.

TAKE CURRENCY CORRELATIONS INTO CONSIDERATION:

Because currencies are priced in pairs, it’s important to understand that currencies are linked to each other, or correlated.

If two assets are positively correlated, it means that they tend to evolve in the same direction, while if they are negatively correlated, they will evolve in opposite directions.

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