Risk Management is traditionally seen as a process designed to avoid or I eliminate risk.
However, due to the fundamental link between risk and return, (profit is a reward for risk)
the total avoidance of risk may not necessarily be in the best interest of the organisation.
Thus, a risk management system must allow the management to deliberately accept risk
such that the risk- return profile is consistent with its overall objectives. It should
encourage the management to focus on its profitability goals vis-a-vis its risk taking
capacity and the associated worst case loss. Risks associated with Foreign exchange
dealing activity can be effectively managed so long as all risks are identified; measured
and necessary controls are instituted.
The peculiarities of foreign exchange markets which result in risk :
It operates as an over the counter market which implies exposure to credit risk.
It is the only market which operates 24 hours a day which means that every open
position is exposed to periods when it cannot be controlled.
It is a multi-location market with no entry / exit barriers therefore competition is a
variable factor. This results in market risk.
Exchange rates fluctuate almost continuously which is the basis of rate risk.
Other markets such as money, capital and debt markets also impact foreign
exchange rates. Effectively there are too many intangibles other than demand –
supply elements that get factored into exchange rates.
Control measures and policies adopted by respective governments also affect foreign
exchange rates. This is a variation of Country risk.
Settlement of a foreign exchange transaction normally does not take place zone risk.
simultaneously i.e.: the currencies are exchanged on the same calendar day but at
two different times due to time zone factors. This results in time zone risk.
What is Risk Management?
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