Chapter 2 – Basic of Forex Derivatives

Risk in forex Operations

1. Exchange Risk – Movement in Exchange Rate

• Transaction Exposure
• Translation Exposure
• Operating / Economic Exposure

2. Settlement Risk

• Pre Settlement Risk –> Not an absolute risk for the bank
• Post Settlement Risk –> Complete risk and loss for the bank

   Avoid By – Settlement System, Operation on single time basic, RTGS basic

3. Liquidity Risk

• Mismatch in maturity pattern of Assets and Liability

   Avoid By – Control on mismatch

4. Country Risk / Sovereign Risk
   • Reduce by disclaimer clauses in contract and subject to third country jurisdiction
   • Fixed county wise exposure limits

5. Interest Rate Risk

• Interest rate risk arises due to adverse movement of interest rates

    Avoid By – Derivative Product like interest rate swaps, Currency swaps & Forward Rate agreements

6. Operational Risk
   • Control by State of art system, Contingency plan, Disaster control / Recovery procedures, Back-up arrangement for man and machine and Monitoring duplication at different site

7. Legal Risk

• Non Compliance of government guidelines and wrong understanding of rules