Forex Investment and Currency Trading

Currency forwards have a symmetrical risk profile. This means that both the buyer and the seller face an equal distribution of potential profits or losses, and that these are essentially unlimited for both the buyer and seller.

Market price risk

The seller of a currency forward assumes an obligation to deliver foreign currency at an agreed exchange rate. If the exchange rate rises, the seller nevertheless has to make delivery at the pre-agreed price, which may be well below the current exchange rate.

• If he is already in possession of the foreign currency, the seller does not benefit from the rising exchange rate.
• If the seller only intends to purchase the foreign currency at a later date, the current exchange rate may be well above the pre-agreed price. His risk lies in the price difference. This risk of loss cannot be determined in advance and is theoretically unlimited.

As the seller of a currency forward, your risk of loss may be far in excess of the value of the collateral you have provided if you do not have the foreign currency on hand but rather only intend to acquire it on the final settlement date. You may incur substantial losses in this case, since, depending on the market situation at the time, you may have to buy at extremely high prices or, if you are unable to deliver the currency as agreed, be forced to pay compensation.

As the buyer of a currency forward, you assume an obligation to purchase foreign currency at an agreed price. Even if the exchange rate falls, you are still obliged to purchase the foreign currency at the agreed price, which may then be well above the currency exchange rate. This risk of loss cannot be determined in advance and may be far in excess of the value of the margin you have deposited.

Transferability risk

Transferability risk is particularly significant in the case of currency forward transactions:

Governments may act to prohibit the transfer of funds or their conversion into other currencies. Although the globalization of capital markets means this transfer risk may be regarded as relatively small, at least in trade between western industrialized contries, it exists all the same.