1. market risk or price risk
the risk arising out of the
movement in rates of foreign exchange currencies is the market risk or pricing
risk. This risk arise out of the open currency position which is unchanged.
Given the magnitude of exchange rate fluctuation the possibilities of
substantial losses highly exists.
2. credit risk
the credit risk arise when
counter party, whether a customer or a bank, fails to meet his obligation and
the resulting open position has to be covered at the ongoing rate. If the rate
has moved against, a loss can result and vise versa.
3. Operations risk
operations risk can arise
because of failure of computer systems. A loss can also occure due to human
error, fraud or lack of effective internal controls. Operative risk could also
arise because most deals are done over the telephone and there could also arise
because most deals are done over the telephone and there could be
misunderstanding over what was agreed in terms of rate.
1. liquidity risk
the risk arises when for
whatever reason market turn illiquid and positions cannot be liquidated except
at a huge price concession. In volatile markets, the bid-offer spread tends to
widen.
Example ; usd ; inr market, in
normal conditions, the inter bank bid-offer spread is 0.5 to 1 paise. But, when
there is volatility or illiquidity due to demand-supply imbalance, the spread
often widens to 5 paise or more.
2. settlement risk
the risk is of the counter
party failure during settlement, because of the time difference in the markets,
in which cash flows in the currencies have to be paid and received.
This risk has made many banks
impose a settlement limit on counter parties for aggregate settlements on any
value date.
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